23 July 2010

Home Sales Dip as Tax Credits Expire

The Wall Street Journal
Glut of Properties on Market Hints at Falling Prices Through Rest of Year as Sector Adjusts to End of Buyers' Tax Credit

Sales of existing homes declined in June while the inventory of unsold homes rose, a combination that doesn't bode well for prices in the months ahead.

In its monthly report on home-sale transactions on Thursday, the National Association of Realtors said sales were running at a seasonally adjusted annual pace of 5.37 million last month, down 5.1% from May but up 9.8% from one year ago.

Home sales surged in the spring as buyers rushed to take advantage of tax credits worth as much as $8,000. To qualify, buyers had to sign purchase contracts by April 30.

Sales fell in most parts of the country in June except in the Northeast, where they rose 7.9% from May. Existing-home sales were down by 9.3% in the West, the largest regional drop.

The Realtors' data for June reflect completions of sales, most of which were based on contracts signed in April and May.

Newly signed contracts plunged by 30% in May from the previous month, when the tax credit expired.

"Given that, you are going to see a huge drop in closed sales in July, and it's going to continue at a minimum until August," said Thomas Lawler, an independent housing economist in Leesburg, Va.

Inventories of unsold homes rose by 2.5% in June to 3.99 million. That is 8.9 months' supply at the current sales pace, up from 8.3 months in May and the highest level since August 2009.

The increase in the inventory of unsold homes was particularly disappointing because the tax credits had been designed to help clear through the glut of unsold homes.

"We've been adding more inventory than we've been selling... That's a worrisome sign in a month when we were paying people to buy homes," said Stan Humphries, chief economist at Zillow.com, a real-estate website.

A national survey of real-estate agents showed that traffic at homes for sale was lower in July than at any time since Credit Suisse began its survey in 2005, following big declines in May and June.

Now, "rising inventory is going to make everything much worse," said John Burns, a housing consultant based in Irvine, Calif.

Inventories are expected to grow in the coming months as banks process more foreclosures, which have been held off the market as banks work to complete government-mandated loan modifications.

Higher levels of unsold homes renew the prospect that home prices will fall during the second half of the year.

"Excess inventories are the mortal enemies of prices. Inventories go up and prices have got to go down," said Gary Shilling, president of A. Gary Shilling & Co., an economic-consulting and financial-advisory firm.

Unsold homes are also growing as signs of home-price stabilization in some markets have encouraged homeowners to test the market. Karen Wiese moved into her current home in Fair Oaks, Calif., five years ago after she and her husband, a homebuilder, decided to live in it rather than sell for less than the $1.1 million asking price.

On Wednesday, she listed the six-bedroom home for $639,000.

"We don't even know if we'll get a looker," she said. Ms. Wiese, 59, is building a smaller home on an adjacent lot and said she wants to downsize because her husband died last year.

One bright spot: falling mortgage rates, which continue to serve as one strong tailwind for the market.

The average rate on a 30-year fixed-rate mortgage on Raleigh homes was quoted at 4.56% this week, according to a weekly survey released by Freddie Mac on Thursday. The 15-year fixed-rate mortgage averaged 4.03%. Both are the lowest since Freddie began its survey in 1971.

Nonetheless, the prospect of weak demand has prompted housing economists to taking a dimmer outlook of the housing market, according to a monthly survey released on Thursday.

Some 60% of the 109 economists and other analysts surveyed by MacroMarkets LLC expect home prices to decline this year, up from 40% in May.

Separately, the Federal Housing Finance Agency said its monthly house-price index in May was up 0.5% on a seasonally adjusted basis from April. The index is up 1.6% over the last three months, but down 1.2% from a year earlier.

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