Why Plummeting Home Sales Matter

This week marks the release of the lowest figure in years

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U.S. pending home sales, home construction, and mortgage applications all declined significantly in May, according to newly released statistics. While the drop was expected due to an expiring federal tax-credit for home buyers, it fell at twice the expected rate of 15 percent, meaning that sales decreased by 30 percent in a single month. This is especially unusual because May is typically considered high season for home buying. The drop brings the number of pending home sales to the lowest since it was first recorded in 2001. It is also the largest percentage decline in home sales since 1963. Because home sales are a forward-looking indicator, unlike job growth which is a lagging indicator, this could have serious consequences for long-term economic growth.

  • Why New Home Sales Matter for Jobs  The Washington Post's Dina ElBoghdady explains, "Although new-home sales are dwarfed by activity in the existing-homes market, they are closely watched because the construction industry contributes to job creation and economic growth." The Moderate Voice's Jerry Remmers adds, "The backlog of unsold new homes is 210,000 which is a drain on market values and only perpetuates the drop in new construction jobs."
  • Can Home Sales Recover?  The New York Times' Christine Hauser writes, "Reflecting on the housing figures, the National Association of Realtors chief economist, Lawrence Yun, said in a statement that job creation was one of the critical elements that would determine whether the housing market can grow without federal stimulus. The association said its index, which tracks pending home sales, fell in May, after the government tax credit for home buyers expired. The index for contracts signed in May fell by 30 percent to 77.6, down from 110.9 in April. The index is down nearly 16 percent from where it stood in May 2009, the association said."
  • Result of Declining Consumer Confidence  The Washington Post's Dina ElBoghdady writes, "The dismal May sales results add to disappointing housing data that suggest buyers are retrenching, possibly because fears about job security are trumping today's tantalizingly low mortgage rates and home prices. Industry reports show that sales of previously built homes also fell in May as mortgage applications continued to sink."
  • Flood Insurance Playing Role  eCreditDaily reports, "many potential sales are being delayed by the expiration of the National Flood Insurance Program, which offers more affordable premiums than the private sector. 'Florida and Louisiana, also impacted by the oil spill, have the highest percentage of homes that require flood insurance,' [NAR economist Lawrence] Yun said."
  • Shows the Folly of Initial Home Buyer Tax Credit  The Big Picture's Peter Boockvar writes, "As with any temporary tax credit that is introduced to stimulate activity, demand gets pulled forward and is then followed by a sharp decline. We’re now seeing textbook economic behavior as a result of these gimmicks in the housing data. Yes its crackpot economics on the part of our policy makers but something we unfortunately have to deal with. The question then becomes what happens after the expected fall off as the industry deals with normal supply and demand dynamics."
  • ...Especially Its Timing  Senior economist at Wells Fargo Securities Mark Vitner tells reports, "The tax credit expired as the peak home-buying season kicked off. ... Imagine what would happen to retail sales if they canceled Christmas."
This article is from the archive of our partner The Wire.