Big Drop in May's Existing Home Sales Avoided by Lingering Credit

In May, existing home sales dropped for the first time since February, according to the National Association of Realtors (NAR). The drop, however, was a small one -- only 2%. That's after an 8% rise in April. If you've been following the housing market's fall after the home buyer credit expired in April, then you probably have the reaction: that's it? Mortgage applications for purchases were down more than 40% during the month, so how can existing home sales have fallen by such a small amount?

In fact, the NAR numbers don't actually reflect the number of home sales started in May, but the number that were completed. That means these homes still qualify for the government credit. Purchases have to begin in by the end of April, but close by the end of June. That means we'll see elevated sales in the NAR's data for this month as well.

The mortgage applications data mentioned above reflects the early stages of home buying, which is why those numbers are much worse. The NAR's home sales number is actually a lagging indicator. But we are starting to see fewer closings already. Here's the historical chart based on the NAR data:

NAR existing sales 2010-05.PNG

Expect that line to dip more in June, and a lot more in July. Most of the support in May was in the west, which saw a 5% rise in sales. Meanwhile, the northeast saw an 18% dip.

May's number might also be revised significantly downward. NAR Chief Economist Lawrence Yun explains:

"However, approximately 180,000 home buyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales.

Congress was considering a bill that would have extended the closing deadline to obtain the credit which would have saved those sales, but it has failed. As a result, some of these sales may be cancelled if the purchase was contingent on closing by the end of June so to utilize the credit. So using the NAR estimate above, home sales may have actually sunk more than 5% during May.

Interestingly, despite the fall in sales, home inventory actually declined in May, by 3%. It had been rising since January. Here's the chart:

NAR inventory v2 2010-05.GIF

May's rise might not mean that much, however, as it could simply indicate that banks were anticipating weaker sales in May, so began holding back more new inventory, rather than unleashing it on a soft housing market. Inventory was still higher than a year earlier by 1%, however.

Finally, home prices rose quite a bit in May, by 4.2%. That's the biggest month-over-month rise we've seen in at least a year. As home sales fall, and inventory begins to grow again this summer, however, prices will likely follow.

All in all, this appears to be pretty happy news for the housing market, considering drastic drop in existing sales that was expected. Yet, it doesn't really reflect a world without the home buyer credit, which is what drives the pessimism. We'll have to wait until July to see how home sales really fare without government support.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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