Housing Market Gets Tax Credit Payback

After surging the previous month, pending home sales plunged in November.

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After they rushed to cash in on a government tax perk the previous month, Americans signed a great deal fewer sales contracts in November, according to a report released Tuesday by the National Association of Realtors. NAR's index of pending home sales—which uses signed contracts, not closings—dropped 16 percent from October to November. Although the measure remained 15.5 percent above its year-earlier level, November's reading was significantly less encouraging than October's, when the index jumped nearly 32 percent higher than October 2008. While economists had predicted a modest monthly decline, the report was much worse than expected. "The consensus was for [pending home sales] to be down 2% ... instead they were down a big daddy whopper 16%," Mark Hanson of the Field Check Group said in a report. "Now that's a miss."

[Check out Home Sales Poised to Dip After Tax-Credit Rush.]

1. Tax credit payback: Housing experts chalked up the decline to the effects of the $8,000 first-time home-buyer tax credit, which juiced contract signings in October at the expense of later months. Under its original terms, buyers needed to close their home sale by the end of November to claim the credit. "[While] this credit was extended and expanded on November 6, sales prior to that were undertaken on the expectation that the credit would expire on Nov. 30, by which time transactions would have had to be settled," economists at Goldman Sachs said in a report. Many buyers scrambled to get their sales contracts signed in October so they could close the transaction by the end of November and claim the credit. The development worked to boost the pending home sales index for October.

[See Home Prices: The Next Leg Down.]

2. Less urgency: In early November, President Obama signed a law that extended the tax credit's deadline to the end of June for transaction closings and expanded the program to include most existing homeowners. With the new deadline still several months off, buyers felt less pressure to sign a contract in November, according to Michelle Meyer, an economist at Barclays Capital. "The extension eliminated some of the urgency to complete a sale even after the credit was extended," Meyer said in report.

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

3. December sales to fall: The tax credit's original deadline made a November drop in contract signings inevitable, said Mike Larson of Weiss Research. "You've got this big, scary 16 percent move—but at the same time it's not a surprise when put in the context of when this happened and the recent increases that had happened previously," Larson said. "In general, pending home sales should not have surprised." Still, the drop does suggest that existing-home sales for December will post a decline when NAR reports them later this month, Larson says. "You are going to probably see a very large single-digit decline when the December numbers come out, and there may be some of that still in January," he said.

4. Spring momentum: The housing market faces some stiff head winds as we enter the New Year—most notably an unemployment rate of 10 percent and the still-unfolding mortgage crisis that threatens to put millions of additional homes on the market through foreclosures. But more affordable home prices, attractive mortgage rates, and recent signs of stability in the economy should give the real estate market a boost as the year marches on, Larson says. Larson expects a gradual—though not spectacular—improvement in home sales as the spring selling season approaches. "You are going to see housing regain a little bit of momentum heading into the New Year," he said.

Meyer also expects pending home sales to improve in the run-up to the spring. "Looking past this volatility, which should persist through [the first half of 2010], the underlying trend in housing demand has decisively improved," Meyer said in a report. "As we have been warning our readers, it is important to prepare for volatility in the housing data over the next several months and not to overreact to the swings."