July 7, 2010
New-Home Sales Plunge

Sales of newly built homes plunged in May following the expiration of special tax credits for home buyers, underscoring how much those subsidies fueled sales in previous months.

New-home sales fell 32.7% from April to a record low seasonally adjusted annual rate of 300,000, the Commerce Department said Wednesday. Compared with a year ago, sales fell 18.3%. New-home sales are calculated based on the number of contracts signed to acquire homes.

The sharp drop comes after home buyers rushed to the market before tax credits expired at the end of April. The report doesn't necessarily indicate a weaker recovery, as the subsidies may have pulled forward sales that would have come later.

Sales increased in March and April, by a downward-revised 12.1% and 14.7%, respectively. When those increases are averaged with the decline in May, sales for that three-month period are comparable to the same period last year.

"It's a concern that even with very low interest rates, you're seeing there's an inability of home sales to move up at all in the past year," said Michael Feroli, chief U.S. economist at J.P. Morgan Chase. "But there's reason to believe going forward things wouldn't be quite as bad as they are in May."

The number of new homes available for sale dipped 0.5% to 213,000, the lowest level since 1970. The national inventory of homes available, which includes existing as well as new homes, jumped to an 8.5 months supply, up from 5.8 months in April.

The expiration of the tax incentive and an excess supply of existing homes for sale also led to a decline in new-home construction and applications for home-buying loans.

Steven Mungo, president of the Home Builders Association of South Carolina, cut the number of new homes he broke ground on to 55 or 60 in May from about 90 in April, to accommodate changes in demand. "We're just seeing the hangover from the tax credit and I fully did not expect to have good sales months in May or June," he said.

New-home sales fell more than 25% in the South, and all other regions also saw sharp declines. The median price of a new home sold in May was $200,900, 9.6% lower than a year earlier.

Source: The Wall Street Journal, June 23, 2010

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