After tax credit expires, new home sales fall to record low in May

New home sales fell to a record low as outlined by a report that was done by the Commerce Department released June 23. A drop in home sales statistics was expected following 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 dropped as well, surprising forecasters who expected them to rise. Unemployment is the primary reason the housing market is doing this bad without the tax credit. Sharp declines in the housing market are threatening the fitful U.S. economic recovery.

Resource for this article: New home sales fall to record low in May after tax credit expires

New home sales are at a new low

New home sales had surged in March and April as homebuyers easily wanted to purchase 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. CNNMoney.com reports that the May decline of 32.7 percent represents a drop to 300,000 homes from 446,000 in April. Sales fell 18.3 percent. It was said by the Commerce Department that 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 will take a hit

The decline in new home sales, if it continues, leads to a decline in housing prices, which will in turn lead to a decline consumer spending also -- the biggest threat to economic recovery. Business Week reports the drop in residential construction will sap consumer spending that really accounts for 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 gave a report saying 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.

New home sales statistics makes government wary

New home sales fell sharply across the U.S., with sales down more than 50 percent within 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 also the home builders' index fell by five points. The dark cloud's silver lining was mortgage rates, which stayed very low. An additional glimmer of hope could very well 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 explains that it can take up to four months to establish a statistically significant trend in sales.

To blame is the US unemployment rate

New home sales seem as though they are being affected by the anemic U.S. job market. Edward Leamer, who is 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 6 percent rate to create “significant reductions” in joblessness. “People won’t purchase homes when they are worried about their jobs,” he told them.

Discover more details on this topic

CNN Money.com

money.cnn.com/2010/06/23/real_estate/new_home_sales/?npt=NP1

businessweek.com

businessweek.com/news/2010-06-23/housing-market-threatens-u-s-recovery-as-sales-slide.html

Marketwatch.com

marketwatch.com/story/new-home-sales-plunge-33-to-record-low-in-may-2010-06-23?reflink=MW_news_stmp