Home Sales Poised to Dip After Tax-Credit Rush

October home sales jumped, but we could be in for a setback in the coming months.

By SHARE

Although home sales surged last month, many housing experts—and even real estate agents' own trade group—are expecting the market to retrench in the coming months as the jolt from a tax incentive's previously impending deadline subsides. On a seasonal basis, existing home sales jumped 10 percent last month from September and nearly 24 percent from October 2008, the National Association of Realtors reported Monday. But along with declining prices and attractive mortgage rates, sales were goosed by home buyers scrambling to close transactions before the original November 30 deadline for the $8,000 first-time home buyer tax credit, experts say. As that impact wears off, "we expect a partial reversal in December and early next year," Michelle Meyer, an economist at Barclays Capital, said in a report. Here are four things you need to know about the development:

1. Prices, Rates, Credit: Home sales were driven higher by three key factors. First, homes continue to get cheaper. The median price of an existing home in October dropped 7 percent from a year earlier. Meanwhile, 30-year, fixed mortgage rates were extremely attractive during the month, falling to 4.95 percent from 5.06 percent in September. On top of that, sales got a kick thanks to the first-time home buyer tax credit, which was originally scheduled to expire at the end of this month. "We think the story here is that people were rushing to complete transactions—the numbers are captured at the point of sales closing—ahead of the then scheduled expiration of the first-time buyer tax credit," Ian Shepherdson, chief US economist of High Frequency Economics, said in a report. However, on November 6, the president signed legislation pushing the tax credit's closing deadline back to the end of June and making most current home owners eligible for a similar perk of up to $6,500.

[Check out Expanded First-Time Home Buyer Tax Credit Becomes Law.]

2. Inventory: Higher home sales are helping the market chew through NAR's inventory of unsold existing homes, which has been putting downward pressure on home prices for some time. The current seven-month supply of existing homes on the market is sharply lower than the 11-month supply of November 2008. But because many foreclosed homes aren't accounted for in its data, NAR's figures alone don't provide an adequate picture of inventory levels. Instead, Patrick Newport, US economist at IHS Global Insight, prefers the Census Bureau's homeowner vacancy rate. This figure—which reflects the number of vacant homes on the market—stood at 2.6 percent at the end of the third quarter. A rate of 1.7 percent is considered normal. Furthermore, a huge number of properties will be lost to foreclosure and add to the inventory in the coming years. The Mortgage Bankers Association said last week that 1 in every 7 American mortgages was either delinquent or in foreclosure through September. And Mark Zandi, the chief economist at Moody's Economy.com, projects that 3 million foreclosure sales will occur in 2010 and 2011.

[See Why Foreclosures Rise Even as the Economy Expands.]

3. Trouble Ahead: Some observers say the rush to finish transactions before the tax credit's original deadline may keep home sales elevated in November as well. But there are signs that sales may take a hit from there. The MBA's seasonally adjusted purchase index for the week ending November 6 dropped to its lowest mark since December 2000. "We expect home sales to give back some of the extraordinary increases posted in recent months," economists at Goldman Sachs said in a report. As the jolt from the tax credit scramble fades, even NAR is lowering expectations. "With such a sale spike, a measurable decline should be anticipated in December and early next year," NAR Chief Economist Lawrence Yun said.

[Check out Are Home Sales Headed for a Late Fall Slide?]

4. 2010 outlook: The first-time home buyer tax credit has persuaded some buyers to make their purchase sooner than they otherwise would have, Newport said. And at some point, the market will take a hit reflecting that. "The first tax credit shifted sales from 2010 into 2009, and the second will shift sales from the second half of 2010 into the first," Newport said in a report. "We project that sales will drop in the first quarter of 2010, payback from the first tax credit. Sales will take a second hit in the third quarter of 2010, payback from the second tax credit. Overall, sales in 2010 will be about the same as in 2009."