New home sales fall to record low in May after tax credit expires

a row of monopoly houses going downhill

New home sales plunged to a record low in May after the home buyer tax credit expired. Home prices and consumer spending are expected to follow, further hobbling a limping economic recovery. Flickr photo.

New home sales fell to a record low according to a report by the Commerce Department released June 23. A slide in new home sales statistics was expected after the home buyer tax credit expired at the end of April. But the 32.7 percent drop in May was more than expected. Existing home sales also dropped, surprising forecasters who expected them to rise. Unemployment is the main reason the housing market is flagging without the tax credit. Sharp declines in the housing market, a critical component of consumer spending, are threatening the fitful U.S. economic recovery.

New home sales: a new low

New home sales had surged in March and April as homebuyers hurried to buy homes before the April 30 deadline for the tax credit. Homebuyers have until June 30 to close the deals for the home tax credit, but the Senate may vote to push that deadline back to Sept. 30. reports that the May decline of 32.7 percent represents a drop to 300,000 homes from 446,000 in April. Sales year-over-year fell 18.3 percent.The Commerce Department said the May figures are the slowest sales pace since it began tracking home sales statistics in 1963. The prior record was set in September 1981, when new homes sold at an annual rate of 338,000.

Consumer spending takes a hit

The decline in new home sales, if it continues,  leads to a decline in housing prices, which leads to a decline consumer spending as well — the biggest threat to economic recovery. Business Week reports that the drop in residential construction will sap consumer spending that accounts for about 70 percent of the U.S. economy. There’s direct correlation between home sales and spending on furniture, appliances and building materials. On June 11 the Commerce Department reported that sales at U.S. retailers fell 1.2 percent in May, the first decline in eight months, led by a record 9.3 percent plunge at building-material stores.

Government wary of new home sales statistics

New home sales fell sharply across the U.S., with sales down more than 50 percent in the West. MarketWatch reports that housing market stats in May were dismal across the board. Housing starts fell 10 percent, building permits fell 5.9 percent, mortgage applications dropped and the home builders’ index fell by five points. The dark cloud’s silver lining was mortgage rates, which stayed very low.  Another glimmer of hope may be that government statisticians have low confidence in the monthly Commerce Department new home sales report, which is subject to major revisions,  sampling flaws and statistical errors. The government says it can take up to four months to establish a statistically significant trend in sales.

U.S. unemployment rate to blame

New home sales are being affected by the anemic U.S. job market. Edward Leamer, an economist at the University of California, Los Angeles, told MarketWatch that unemployment is the main reason housing is weakening without the tax credit to spur demand. The U.S. economy would have to grow at a 5 percent to 6 percent rate to create “significant reductions” in joblessness. “People won’t buy homes when they are worried about their jobs,” he said.

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