Housing Demand Evaporates As Stimulus Ends

Sales of new homes dropped 12 percent in July to their lowest level in 47 years.

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Demand for housing has plunged to historic lows now that Uncle Sam has removed a key stimulus program from the market, a development that threatens to torpedo a real estate rebound as well as a broader economic recovery.

Sales of newly constructed homes in July dropped 12 percent from the previous month to their lowest level since recordkeeping began 47 years ago, the Commerce Department said Wednesday. (Sales were off by nearly a third from a year earlier.) As builders have slashed production volumes, inventory levels have declined. The 210,000 new homes listed for sale at the end of July—which was equal to June's total—represent the fewest number of unsold properties on the market since 1968. But with sales tallies sliding, the months' supply of unsold homes at the current sales pace—a closely watched gauge of inventory levels—increased to 9.1 from 8 the previous month.

The discouraging news comes a day after the National Association of Realtors reported that existing home sales, which make up a much larger portion of the market, also plummeted to record lows.

[Check out Home Prices Likely to Slide After Sales Plummet.]

New home sales increased this spring as buyers scrambled to sign contracts by April 30 to qualify for the federal government's $8,000 home buyer tax credit. (New home sales are counted at contract signing.) Sales plunged in May as a result of the tax credit's pull-forward distortions, but bounced back 12 percent the following month. The most recent figures, however, showed that sales in July were even weaker than in May—the month immediately following the tax credit's deadline for contact signings. "This was a particularly disappointing report since the effects of the expiration of the first-time home buyer tax credit should have dissipated by July," Theresa Chen, an economist at Barclays Capital, said in a report.

Patrick Newport, a U.S. economist for IHS Global Insight, argues that recent distortions linked to the federal tax credit had made it tough for economists to gauge the underlying level of housing demand in the market. "Now that the credits are behind us, the dust is settling and the news is not good," Newport said in a report. "July's record-low new home sales figures and weekly data from the Mortgage Bankers Association on purchase applications indicate that housing demand is extremely weak—weaker than it has been since the housing downturn began in late 2005." These figures indicate that existing home sales should remain depressed in August, he said. And slowing sales could lead to additional home-price deterioration in the coming months.

[See Housing Market Takes Another Step Backward.]

The pullback is sales is occurring in the face of two forces that traditionally pull buyers into the market: lower prices and cheap mortgage rates. Home prices in 20 major cities have dropped about 29 percent from their 2006 peaks, while rates on 30-year fixed mortgages fell to 4.56 percent in July. But Celia Chen, senior director at Moody's Analytics, points to two specific factors undercutting sales and warns that "the potential for the housing market to drag the economy back into recession is also rising."

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First, the weak labor market is hog-tying demand. "Further, the new-home market faces stiff competition from the large number of distressed homes on the market," Chen said in a report. "This is keeping the months of inventory for new homes elevated, despite the near-record low number of them available for sale."

Sustainable job creation is essential to rekindle enough demand to absorb the glut of unsold homes and spark a real estate recovery.