Americans again signed fewer contracts to buy homes in June, as the real estate market continues to deteriorate following the removal of a key stimulus from Uncle Sam.
The pending home sales index—a gauge of the housing market's health that measures signed sales contracts—dipped nearly 3 percent in June from a month earlier to its lowest-ever level, the National Association of Realtors said Tuesday. The index, which launched in 2001, fell 19 percent from June 2009.
The disappointing reading comes after pending home sales posted a staggering 30 percent drop from April to May. "If you are looking for a pulse in the U.S. housing market, best of luck," says Mike Larson of Weiss Research. "After the big plunge, I think there were some expectations that you would see home sales get a little bit of a 'dead cat' bounce. Clearly it wasn't there."
[Check out: Home Sales Poised to Drop In Coming Months.]
The sharp drop in pending home sales is rooted in the expiration of the federal home buyer tax credit. Uncle Sam had been handing out tax credits worth up to $8,000 to eligible home buyers who signed a sales contract by April 30. The pending home sales index increased significantly in the months leading up to the deadline—rising from 90.2 in January to 110.9 in April—as buyers raced to get contracts signed in time to qualify for the credit. But once the deadline passed, demand plummeted. "The whole effect of the tax credit was just a pulling forward of demand," says Brad Hunter, chief economist at Metrostudy.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, is optimistic that the index won't see additional declines. "This should mark the end of the post-tax credit plunge in sales," Shepherdson said in a report. "We see little scope now for sales to drop much further."
Even if the pending home sales index recovers, the declines it has already posted suggest that existing homes sales will drop in the coming months. "Since the vast majority of pending home sales go to settlement in two to three months, the June reading suggests that some further weakness in existing home sales may be in store," Michael Gapen of Barclays Capital Research said in a report. Sales of previously owned homes could record a month-over-month drop of 19 percent or greater in July, according to Patrick Newport, a U.S. economist for IHS Global Insight.
On top of rising inventories, slowing sales could drag home prices lower, Hunter says. "We are noticing and hearing about more price reductions by those that are listing homes for sale," he says. "This latest report is in line with our general feeling that there is still a lot of negative pressure on prices in the resale market." Hunter expects real estate values—as measured by the S&P/Case-Shiller home price index—to decline in the second half of this year before hitting bottom sometime in 2011.
Despite some favorable conditions for buyers—like cheaper home prices and record-low mortgage rates—the economic recovery has failed to produce an essential ingredient for a real estate rebound: sustained job growth. "It is kind of remarkable to see this sort of weakness when you have mortgage rates that are at essentially at the lowest levels they have been in the last century," Larson says. "But the jobs just aren't there."
And until the labor market turns around, a convincing recovery in housing will be difficult to achieve, Larson says.