The Housing Market Struggles as Home Sales Drop

The economic recovery could be in trouble as May sales of previously built homes dropped sharply. The recent federal tax credit designed to stimulate homes sales did not worked as well as expected.

Federal tax credits of up to up to $6,500 for existing homeowners and $8,000 for first-time buyers was created to help home invigorate sales. The cut-off date to get a signed sales contract and qualify was April 30. Buyers must close their purchases by June 30. The report only includes home that actually change hands during the period and not potential sales waiting to close.

Foreclosures accounted for almost a third of sales during the month indicating that home prices have not yet stabilized and future price reductions could be in the short-term future. Despite the poor report the vast majority of economists do not believe this month is an indication of a long-term trend that could lead the economy back into a recession.

The number of individuals entering real estate offices seeking property also declined in conjunction with the ending of the tax credit. The effect of the federal benefit was a short-term financial plus for industry employees as well as the proprietors of the agencies.

A strong real estate market would have a 6 month supply of unsold existing homes but it now stands at 8.3 months which is an indication of a declining market in the near-term. However, due to the federal tax credit the inventory of unsold homes did decrease by 3.4 percent to 3.9 million.

Sales of existing homes slowed down in most regions of the country despite very low interest rates and favorable home prices. The only monthly gain was in the West where sale increased 4.9 percent over the previous month.

Most experts in the industry expected the federal tax credit to have a greater impact contributing to higher sales for a longer period. However, delays in the mortgage process quickly became apparent which contributed to the less than stellar results that were expected.

Industry estimates state that over 180,000 individuals actually signed contracts to purchase a home but will not be eligible to claim the tax credit due to their inability to meet the cut off closing date of June 30. Because of this real estate lobbyist are strongly supporting a Senate proposal that would extend the closing deadline to Sept. 30.

The May report did have a few positive facets to it though, particularly when match up against last years report for the same time frame. Last year when the economy was in a recession sales were 19.2 percent lower and sales did grow 10 percent over the winter months.