Existing Home Sales Drop, Despite Incentive

Existing home sales drop. An aerial view of a suburbSales of existing homes dropped unexpectedly in May, according to data released today by the National Association of Realtors. Economists had predicted that sales would rise, buoyed by the home buyer tax credit. (The deadline for contract signings was the end of April, but buyers have until June 30 to close.)

Simply put, the economists were wrong.

Completed transactions of previously owned single-family homes, town homes, condos and co-ops, were at a seasonally adjusted annual rate of 5.6 million, down 2.2 percent from April but up 19.2 percent from May 2009. This means that if sales continue at the current rate, 5.6 million existing homes will change hands in 2010. Experts polled by Reuters had called for sales to rise 5.5 percent to 6.12 million units.

NAR economist Larry Yun explains that May sales dropped because of delays in mortgage processing, particularly for short sales. In addition, Congress's failure to reauthorize the National Flood Insurance Program is delaying closings, because the government stipulates that homes with federally insured mortgages in areas prone to flood to have flood insurance.

The NAR headlined its report with the cheery year-on-year figures, but we already knew we're off the bottom. The question is how robust is the recovery?
It depends on how you look at it. If you expected the gang-buster gains of this spring to continue, you are overlooking the artificial injection from the home buyer credit. But there's no reason to get completely pessimistic, either.

Jim O'Sullivan, chief economist at MF Global, says the real trend is somewhere between the recent ups and downs.

"The data will be artificially low for a few months after being kept artificially high," he says. "To find the real current trend you have to put them together."

Data is likely to remain distorted in this way until about August, he predicts. Then, we're likely to resume the recovery at a more measured pace.

That means: beware. News is likely to get worse before it gets better. Case in point is tomorrow's new home sales report due from the Commerce Department. Experts polled by Reuters expect new homes sales in May to have fallen 19 percent from April to an annual rate of 410,000.

By the way, the reason experts are more pessimistic about new homes sales than about existing home sales, is because new-home sales data are based on contract signings while existing home sales number are based on closings. This means that new-home buyers who wanted to take advantage of the June 30 closing deadline would have tried to sign their contracts before May and therefore would not make it into the reading.

That's the kind of detail that makes most housing data impossible to compare, forcing everyone to guess as best they can. Let's see what fortunes tomorrow brings.


Want to learn more about home buying and home finance? If so, you won't want to miss
our online discussion with industry experts,
What Works Now: Smart Moves When Buying a Home,"
created by AOL Real Estate in participation with Bank of America Home Loans.
Watch it now on AOL Real Estate

Read Full Story

Find a home

Powered by Zillow