What Buyers and Sellers Should Know About New Home Sales Plunge

What buyers and sellers should know about the drop in new home sales.

June 25, 2010 — -- New home sales plunged nearly 33 percent in May, according to a report from the Commerce Department.

The report released Wednesday detailed the record drop that stunned industry watchers.

Analysts had been expecting to see sales up during May but were confounded as delays in the mortgage process seem to be delaying finalized sales. Existing home sales are counted at the closing, unlike new home sales, which are counted when the contract is signed.

Existing home sales also were unexpectedly lower during May. A report on Tuesday from the National Association of Realtors showed sales dropping 2.2 percent to a seasonally adjusted annual pace of 5.66 million units.

Mellody Hobson, "Good Morning America's" personal finance contributor and president of Ariel Investments, appeared on the show this morning to talk about what the dive in home sales means for buyers and sellers.

Hobson said most experts had expected existing home sales to rise by 5.5. percent, and expected new home sales to drop 15 percent, not 33 percent. Hobson said the large drop was due to expiration of the federal homebuyer tax credit and to the large number of distressed homes that are on the market.

But she cautioned that people should put the reports into perspective. New home sales were only responsible for 8 percent of sales in April, so while the drop is significant, it doesn't dominate the housing market, she said. She even pointed out that existing home sales were up 19 percent over May of 2009.

Hobson said the housing market would return to pre-recession levels, but said it would take time.

She also offered advice for people who were currently in the market :

Q: What should buyers do now?

A: She said those who had money for a downpayment and a solid credit rating should buy now, even if they've missed the homebuyer tax credit. She said mortage rates were still at historic lows, noting that 30-year fixed rate mortgages were at 4.76 percent and 15-year mortgages were at 4.14 percent.

People who take out a 30-year mortgage on a $200,000 home would pay about $125 less per month than those who took on the same mortgage a year ago, she added.

She also cautioned that people shouldn't overextend themselves. They should think of their home as their primary place of residence, and not as an investment, she said.

Q: What about sellers? Isn't this bad news for them?

A: She acknowledged that this wasn't good news for sellers, but said people should be realistic about their asking prices. While people may be emotionally tied to what they think their home is worth, memories don't add monetary value, she said. She urged people to consult with a real estate agent to make sure they were pricing their homes to sell.

People who aren't getting the offers they want should consider renting their home until the market rebounds, she added.

Q: What about sellers who are considering foreclosure?

A: This should always be the last option, she said. A foreclosure is devastating to your credit score. Someone who is seriously delinquent should consider a short sale -- in which the lender agrees to allow you to sell our home for less than you actually owe on the mortgage, then you turn that money over to the bank and the bank usually calls it even, she said.

While a short sale can also damage your credit score, it's nowhere as devastating as a foreclosure, she said.

Web-extra tips:

Hobson offered some additional tips for people who are in the housing market.

To improve the chances of selling your home, de-clutter it. This will make the house look bigger and cleaner. Spruce up your house with minor improvements: repair door handles and improve the landscaping to make your house more attractive.

Buyers currently have the bargaining position in this market. See if the buyer is willing throw-in extras, such as built-in appliances or paying some of your first year's property taxes or association dues. Your requests should be within reason.

If you are looking to buy a foreclosed home, make sure you see the house first before buying it. Get a private inspection done so you know exactly what you are getting.

ABC News' Daniel Arnall contributed to this report.

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