Despite better-than-expected new home sales in March, a Wells Fargo (WFC) economist said builders will continue to struggle until the foreclosure wave begins to recede. The Census Bureau reported new home sales increased 11% in March. But they remain at “an extremely depressed level,” said Wells economist Anika Khan. Builders dropped inventories of new homes to 183,000 units, the lowest level since 1967. Khan attributed the monthly increase from slow sales in February to harsh weather that month. Khan points out builders are pressured by the ever-widening price gap between new homes and foreclosures. The median price of an existing home is $159,600, roughly 25% below new home prices of about $213,800. In California, median prices for traditional home sales are 88% higher than previously foreclosed homes, according to the California Association of Realtors. “The large price gap will continue to make it difficult for builders to compete,” Khan said. “Unfortunately, the gap will likely remain until the pace of foreclosures moderates.” In a separate report released earlier in April, Khan said builders have “little incentive” to ramp-up building activity with foreclosures and short sales taking up such a large percentage of the market. Housing starts rose 7.2% in March to a pace of 549,000 units. Khan projects starts to increase to a 620,000-unit pace in 2011, an increase of 5.9% from the year before. “Single-family starts remain at extremely depressed levels and any recovery will be long and arduous due to the oversupply of existing homes on the market and the increasing amount of distressed transactions,” Khan said. Write to Jon Prior. Follow him on Twitter @JonAPrior.