New homes versus existing homes
In contrast with existing home sales which appear to be stabilizing, the new home sector is experiencing a decline. Just yesterday, it was announced that housing starts are down 17.2% (the slowest pace since May 2009), new home production is down 10% (the slowest pace since December 2009) and permits are down 9.9% in May.
None of these data points even come close to the disastrous news today from the U.S. Census Bureau revealing that new home sales plummeted 32.7% in May after the expiration of the tax credit, shattering economists’ projections for a slow month, but this dip is the lowest on record since the government began keeping track of this data in 1963. To give it some perspective, the previous record held was in September of 1981.
Is it a national or regional problem?
This 32.7% plummet is unfortunately spread out across all regions with the West being hit the hardest, having declined 53.2%, followed by the Northeast which dipped 33.3%, the South declining 25.4% and the Midwest dropping 23.9%.
The historic drop has left the industry with a 5.8% increase in months’ supply, ending May with an 8.5 month supply of new homes. This inventory spike, given the newly tempered and not overly ambitious nature of home builders is surprising to many forecasters.
“The big drop-off in new-home sales this May emphasizes how effective the tax credit program was in bringing home buyers back to the market while it was in existence,” said the National Association of Home Builders’ Chief Economist David Crowe. “Because many buyers moved quickly to take advantage of the tax credits, sales that would have taken place in May or June were likely pulled forward to meet the program’s deadline – which is why we have been projecting softer sales numbers for the second quarter. But once this ‘hangover’ subsides, we do believe that the improving economy, rising employment, excellent mortgage rates and stabilizing home values will be strong incentives that will encourage home buyers to return to the market.”
Not all agree with this sunny sentiment
Although the current scuffle over tax credit applicants not being able to close transactions by the June 30th deadline, the Senate may save these buyers and approve an extension for September 30th to keep these buyers in their current transactions (regardless of whether industry insiders agree that this is a healthy move or not).
The Real Estate Bloggers columnist Tom Royce said, “What has analysts and the industry nervous is that if the contracts signed in anticipation of getting the home owners rebate do not close at the rate expected, it could send shockwaves through the industry. So many homes are sold now on a contingency basis. This means the home I want to buy can not close until I sell my home. If contracts start to fail, it could have a cascading effect throughout the industry and homes will be returned to the market, without the benefit of the homebuyers tax credit.”
Anika Khan, an economist at Wells Fargo told CNN Money, “Clearly, the lack of a tax credit had a lot to do with it, and it’s going to be a bit of a bumpy road ahead as we get a few more months of payback.” Khan expects home sales to remain depressed through the third quarter as home construction continues to contract and lending standards remain tight, but that sales should pick up slightly in the fourth quarter. Although, she added, we are still years away from a normal level of new home sales.
As several Agent Genius writers have mentioned in the past, a recovery in unemployment may be the only true key to an overall real estate recovery. Even if existing home sales are recovering, the new home sales sector is a major part of the overall health of the industry, so we will continue to track both in hopes that Khan’s projection that we are “still years away from a normal level” will not come true.
CC Licensed image courtesy of globetrotters via Flickr.com.