End of Home Buyer's Credit Spells Doom for Housing Sales

June 23, 2010 — -- The month of May was a record-breaking disappointment for the residential real estate market after potential buyers, no longer buoyed by a generous federal tax credit for home sales, held off on purchases.

This morning the Commerce Department reported sales of newly built homes fell by almost a third during May, confounding analyst expectations and dropping to a record low level.

Sales of new homes have never been slower since the government started measuring in 1963 and that's put home builders' confidence into a tailspin.

"The home buyer tax credit did its job in stoking spring sales and we expected a temporary pull back in the builders' outlook after the credit expired at the end of April," said Bob Jones, a home builder from Bloomfield Hills, Mich. and chairman of the National Association of Home Builders. "However, the reduction in consumer activity may have been more dramatic than some builders had anticipated, which resulted in their lower confidence levels."

As sales slowed, builders countered with lower prices. The median price of a new home sold last month was $200,900 – 10 percent lower than the median price a year ago.

And it's not just new homes sales that are dropping off. Existing home sales were unexpectedly lower during May, too. A report yesterday from the National Association of Realtors showed sales dropping 2.2 percent to a seasonally adjusted annual pace of 5.66 million units.

Analysts were 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.

"We are witnessing the ongoing effects of the home buyer tax credit, which we'll also see in June real estate closings," said Lawrence Yun, chief economist for the realtor's group. "However, approximately 180,000 home buyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales."

Residential Home Sales Plunge After Tax Credit Expires

There was some encouraging news for the housing market amid the reports. Median prices for a pre-owned home sold in May were up 2.7 percent over last year while the combined sales pace for new and existing homes remained above what it was a year ago.

Nonetheless, many analysts are now predicting the country won't see a settled, steadily growing market until spring 2011.