Home sales report for May could signal economic downturn

Home sales report for last month showed a drop in sales of previously occupied homes, despite government tax credits.

Home sales report for May was down 2.2 percent. In this 2009 file photo, a 'for sale' sign sits outside a vacant home in Dallas, Texas.

REUTERS/Jessica Rinaldi

June 22, 2010

The housing market may be on the verge of taking another plunge that could weaken the broader economic recovery.

Sales of previously occupied homes dipped in May, even though buyers could receive government tax credits. And nearly a third of sales in May were from foreclosures or other distressed properties. That means home prices could soon be heading down after stabilizing over the past year.

Last month's sales fell 2.2 percent from the previous month to a seasonally adjusted annual rate of 5.66 million, the National Association of Realtors said Tuesday. Analysts who had expected sales to rise expressed concern that the real estate market could tumble once the benefit of the federal tax incentives is gone entirely, starting next month.

IN PICTURES: Top 10 cities where home prices have improved most (or fallen least) in the past year

The report is "a worrisome sign for what will occur in July and thereafter when the effect of the tax credit is behind us," said Joshua Shapiro, chief U.S. economist at MFR Inc., an economic consulting firm in New York.

Still, most economists don't expect the housing market to be weak enough to pull the economy back into recession. They anticipate that home sales will dip over the summer, then start growing by fall as the 9.7 percent unemployment rate begins to decline.

Existing home sales have climbed 25 percent from the 4.5 million annual rate they hit in January 2009 — the lowest level of the recession. But they're still down 22 percent from the peak rate of 7.25 million in September 2005.

The report counts home sales once a deal closes. So federal tax credits of up to $8,000 for first-time buyers and up to $6,500 for existing homeowners helped prop up sales in May. The deadline to get a signed sales contract and qualify was April 30. Buyers must close their purchases by June 30.

The tax credits were expected to lift sales in May and June. Lawrence Yun, the Realtors chief economist, said delays in the mortgage-lending process put about 180,000 potential buyers in limbo. They are unlikely to qualify by the June 30 deadline. The trade group is pushing Congress to extend the deadline for closing a sale until Sept. 30.

Real estate agents report a decline in foot traffic, meaning sales could worsen in the coming months.

"The urgency just isn't there," said Pat Lashinksky, CEO of ZipRealty Inc., which has agents in 22 states.

Floyd Scott, broker-owner of Century 21 Arizona-Foothills in Phoenix, said his office had about 25 percent fewer signed contracts to buy homes in May than it did a month earlier.

"The tax credit stopped and boy, I'll tell you, it was like, 'Wait a minute. Is the phone still working?'" Scott said.

Another troubling sign is the number of foreclosures and short sales. Short sales occur when lenders let borrowers sell a home for less than they owe on their mortgage. Together, foreclosures and short sales made up 31 percent of sales in May. And those numbers could rise because the government's efforts to help troubled homeowners keep their homes have had only modest success.

More than a third of the 1.2 million borrowers who have enrolled in the Obama administration's $75 billion mortgage modification program have dropped out. About 340,000 homeowners, or 27 percent of those who started the program, have received permanent loan modifications and are making payments on time.

The decline in May home sales reflected a plunge of more than 18 percent in the Northeast. Sales were unchanged in the Midwest but rose nearly 5 percent in the West and 0.5 percent in the South.

The inventory of unsold homes on the market dropped 3.4 percent to 3.9 million. That's an 8.3 month supply at the current sales pace, compared with a healthy level of about six months.

First-time buyers made up 46 percent of sales.The median sales price in May was $179,600, up 2.7 percent from a year earlier.

While the rise in home prices is encouraging, analysts don't see that lasting. They say the vast number of unsold homes on the market and the anticipated rise in foreclosure sales will drive prices down over the next few months.

"Prices will hit the low point next year," said IHS Global Insight economist Patrick Newport.

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