New home sales fell to a record low as outlined by a report by the Commerce Department released June 23. A slide in new home sales statistics was expected following the home buyer tax credit expired in April. But the 32.7 percent drop in May was more than expected. Existing home sales dropped also, surprising forecasters who expected them to rise. Unemployment is the main reason that the housing market is doing so bad without the tax credit. Sharp declines within the housing market, which appears to be a critical component of consumer spending, are threatening the fitful U.S. economic recovery.
New home sales are at a new low
New home sales had surged in March and April as homebuyers hurried to purchase homes before the April 30 deadline for the tax credit. Homebuyers have until June 30 to close the deals if they want 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 which were there in April. Over the year, the sales fell 18.3 percent. It was said by the Commerce Department the May figures are the slowest sales pace given that it started tracking home sales statistics in 1963. The prior record was set in September 1981, when new homes sold at 338,000.
A hit is take by consumer spending
The decline in new home sales leads to a decline in housing prices, which leads to a decline consumer spending also — the biggest threat to economic recovery. Business Week reports that the drop in residential construction will sap consumer spending that actually accounts for 70 percent of the U.S. economy. There’s actually a 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, which is the first decline that has happened in eight months, led by a record 9.3 percent plunge at building-material stores.
Government seems wary of new home sales
New home sales fell 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 stats fell 10 percent, building permits fell somewhere around 5.9 percent, mortgage applications dropped and also the home builders’ index fell by five points. As the silver lining, mortgage rates stayed 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 set up a statistically significant trend in sales.
U.S. unemployment rate to blame
New home sales seem as though they are being affected by the anemic U.S. job market. Edward Leamer, an economist at the University of California, Los Angeles, explained to MarketWatch that unemployment is the primary 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 explained.
Citations
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
