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New home sales data for May shocks the real estate industry

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.”

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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.

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Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

18 Comments

18 Comments

  1. Joe Loomer

    June 23, 2010 at 8:08 pm

    Unfortunately – at the micro level – our area is now flooded with $60-$70 sq ft new homes due to one national builder coming to town and lowering the standard but throwing in the eye candy (stainless steel and granite counters). Many local builders lost everything, and then just up and quit. The bigger of the small local fish have now been forced to compete on the same level, passing on the cuts to local contractors and lowering their own standards. Net result is subdivisions begun in the mid 2000 era are soon to see massive appraisal problems due to new floor plans being built at $20-$40 per sq ft cheaper.

    Worse – the national folks brought their own contractors, creating no jobs.

    New construction in our area showed an increase year-over-year in 2009 for the first time since 2003. It’s about to head south again – in a hurry.

    Navy Chief, Navy Pride

  2. Ruthmarie Hicks

    June 23, 2010 at 11:16 pm

    Although there is some new construction around my area – the bulk of it is hangover from the end of 2005-2006. Most of this was in the high-end luxury sector – particularly luxury condos. One of the problems that I have seen is that builders in the NY area (20 miles north of Manhattan) just wouldn’t take that price hit. Even now – some are sticking to their guns on price. I realize that they have already come down considerably but COME ON GUYS!!! It’s not going to get any better. The longer you wait – the worse it gets.

    A couple of weeks ago after endless back and forth on a new high-end condo – the listing agent said “You must understand that the builder needs to maintain the integrity of the complex and can only compromise so much.” HUH??? You came down $5k on a list price of nearly $550k – which btw – is highway robbery for a 1 BR condo in this market. Your complex has high maintenance fees as well as very high taxes and the units are more expensive than some of the entry-level homes in the area – which would fly with a 2 BR unit but not 1 BR. Also, how exactly are you expecting my buyer to get financing – especially since they are less than 70% occupied? My client’s purchase would put the complex OVER that 70% – which would make selling future units easier. We are not asking for the moon – just something half way reasonable.

    For those builders who are willing to negotiate price – and some are – the inventories are shrinking. It took a long time to get them to that point and I wish the other builders would do the same. These units are clogging the market and buyers that are holding out for “brand new” won’t pull the trigger. I just hope that by the time these builders come around, interest rates will still be low enough for these buyers to actually buy.

  3. BawldGuy

    June 24, 2010 at 11:36 am

    >…a recovery in unemployment may be the only true key to an overall real estate recovery.

    Isn’t the real trillion dollar question what the catalyst will be for a return to low unemployment? That catalyst will be what it’s always been — lower tax across the board, including business & cap gains. Once that happens, jobs will return. This was proven by JFK, Regan, and W.

    No tax cuts, just tax hikes? Redecorate your financial bunker, go for cash flow, and used extra cash to eliminate debt.

  4. Mark Jacobs

    June 24, 2010 at 1:33 pm

    Unfortunately – at the micro level – our area is now flooded with $60-$70 sq ft new homes due to one national builder coming to town and lowering the standard.

  5. smart home

    June 24, 2010 at 2:35 pm

    I don’t know why anyone in the industry or especially the politicians are surprised that sales have plummeted after the tax credit expired. I think, the tax credit should be extended for at least the next 2 years, so that the market has time to stabilize.

  6. Jim Gatos

    June 27, 2010 at 7:28 am

    In spite of this crazy market, I have a builder friend of mine who has been building homes on “Spec” for over 25 years. Can’t build a single home now because no bank in the area wants to finance for “spec” building. Now he is forced to get cash from other sources. This is someone who NEVER had a loss, ever..

    There’s another reason why the new construction market has gone to hell..

  7. Nick Nymark

    July 30, 2010 at 8:08 pm

    Around here in Fargo North Dakota, Moorhead Minnesota, and West Fargo North Dakota I think New Construction & Existing home sales are still doing well. Feels good to be doing business here in this area.

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