New-Home Sales Plunge, What Next?

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The news that new-home sales fell by a staggering 33% in May — the month after the $8,000 new homebuyer tax credit ended — has the housing industry reeling.

What’s on tap for the housing market now — and why is the dreaded term “double dip” on the lips of more and more housing industry observers?

Overall, U.S. new-home sales fell to an annual pace of 300,000 — that’s the lowest number recorded since the Commerce Department began tracking new-home sales back in 1963. Economists had expected new housing purchases to decline by 19% — to a 410,000 annual pace. The median price for a new U.S. home also slid — by 9.6% to $209,000, compared to the same period a year ago.

Adding to the carnage was a 2.2% drop in sales of previously occupied homes in May compared to April.

The chief culprit for the big decline seems to be the recently-ended $8,000 new homebuyer tax credit. That credit, which essentially gave new homebuyers $8,000 toward a new home, was ended on April 30 (although Congress recently extended the home-closing end of the credit from June 30 to Sept. 30).

The short-term impact of the May housing numbers was immediately apparent: the Standard & Poor’s 500 Index dropped .6% following the housing report Wednesday morning.

Meanwhile, the benchmark U.S. Treasury Note fell from 3.17% on Wednesday to 3.09% by Thursday morning. Both numbers indicate the financial markets view the housing numbers, along with another flat unemployment claims number this week, as red flags that the economic recovery is fragile at best, and in danger of a “double-dip” slide back into recession at worst.

Some additional key effects from the lousy May housing numbers include:

Home prices are even more affordable. With new housing purchases down, sellers may well have to cut their sales prices to generate some buyer interest.

More layoffs could be on the way in the construction market. According to Credit Suisse (Stock Quote: CS), residential construction now encompasses only 2.4% of total U.S. gross domestic product. That’s down from 6.3% in 2005. Expect that number to slide even lower if people are shying away from new-home purchases.

Interest rates will almost surely remain low. The Federal Reserve was getting some pressure from economists to hike interest rates. But with the housing market on the precipice once again (and the jobs numbers so meager), the Fed won’t be raising rates anytime soon.

Lower tax revenues for municipal, state and federal government. Few new houses being built means lower tax revenues for local, state and federal governments — just at the time they need the money most. The National Association of Homebuilders estimates that just one newly-built home triggers three new, full-time construction jobs each year. It also generates about $90,000 in new taxes.

No push for a new homebuyer’s tax credit. As economists review the housing industry’s scarred landscape, fewer of them are likely to lobby for another round of homebuyer tax credits. Without that $8,000 carrot being dangled by Uncle Sam, the urge to buy now is reduced — and economists say that throws the entire housing market out of whack.

There’s no telling what will happen next in the housing market. Some economists expect June to be a better month (it’s typically a good month for home sales), while others say that the summer home sale season is headed off a cliff. Either way, the ripple effect from the May housing numbers could be felt across America for months.

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