Home sales activity plummeted in May, as a key housing stimulus was removed from the market.
Sales of new homes fell by 33 percent in May from April to the lowest level ever recorded, the Commerce Department said Wednesday. "A new low point in the 47-year history of this housing market metric," David Resler, the chief economist at Nomura Securities, said in a report. (Record keeping began in 1963.)
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The sluggish sales worked to increase the months' supply of unsold homes—a key inventory yardstick—to 8.5. That's up sharply from 5.8 in the previous month. Meanwhile, the median price of a new home fell 10 percent, to $200,900, from May 2009.
Economists had expected to see a significant pullback in sales following the April 30 expiration of the federal home buyer tax credit. The volume of home-purchase mortgage applications, for example, fell sharply in the weeks immediately following the deadline. Still, May's sales drop was even worse than the 19 percent decline economists had predicted.
The tax credit offered up to $8,000 for qualified buyers who signed a sales contract by the end of April and closed their transactions by June 30. The incentive worked to juice home sales in the runup to the deadline, as buyers who would have otherwise bought a home in May or June scrambled to sign contacts in time to claim the tax perk.
"To qualify, people had to sign contracts by April 30 and close by June 30," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a report. "New home sales are captured at the point of contract signing, so May sales have duly plunged."
Home sales could remain depressed in the coming months as demand reformulates. "The next few months are likely to be very grim," Shepherdson said. But even without the tax credit, would-be buyers will have tempting reasons to get into the market. Home prices have fallen precipitously from the peaks they reached during the housing boom. Meanwhile, 30-year fixed mortgage rates stood at 4.75 percent for the week ending June 17. Still, a national unemployment rate in the 10 percent range will force many perspective buyers to stay on the sidelines.
Theresa Chen of Barclays Capital said the tax credit has made it more difficult to tell where the market is headed. "Today's report was below expectations, but the underlying level of demand will not be apparent until the distortionary effects coming from the tax credit fade," she said in a report. "We expect new home sales to bottom over the next couple of months and to return to a gradual upward trend thereafter."
But Patrick Newport of IHS Global Insight says sales might rebound earlier. "Going forward sales should improve—perhaps as soon as June—because of job growth and inventory restocking," he said in a report.
Even as sales declined, the report found that the number of unsold new homes on the market dropped by 1,000 to 213,000. "The lowest level since 1970," Brian Wesbury, chief economist at First Trust Portfolios, said in a report.