New-Home Sales Hit Bottom in May

May's 33% plunge in new-home sales to a record-low 300,000-unit annual rate closed out a roller-coaster spring season for new-home purchases. The month's swoon followed a revised 14.6% increase in April. May's rate was the lowest for new homes since the U.S. government started keeping records for the statistic in 1963. A Bloomberg survey had forecast new-home sales would fall to a 400,000-unit annual rate in May.

A similar new-home sales rise-fall pattern occurred during the homebuyer tax credit's first phase, which ended Oct. 30, 2009. During that phase, new-home sales fell 7% to a 368,000-unit rate in November 2009 from a 396,000-unit rate in October 2009. Given the repetition of this pattern during the tax credit's second phase, it's reasonably safe to conclude that the incentive increased homebuyer traffic and boosted commercial activity in the housing sector.

May's tumble was nationwide: Sales plummeted 53.2% in the West, 33.3% in the Northeast, 25.4% in the South and 23.9% in the Midwest.

Equally significant, inventories swelled to an 8.5-month supply in May at the current sales pace, up from a revised 5.8-month supply in April. The median sales price was $200,900 in May, a 9.6% decline from a year ago and the lowest median price since late 2003.

Should Homebuying Incentives Go Elsewhere?

The May data also suggest that the new-home market will need about two quarters, perhaps longer, to return to a normal 700,000-unit to 800,000-unit annual rate. Existing home sales, which totaled a 5.66 million-unit annual rate in May, have already gone back to normal level.

Beyond the normalization timetables, the U.S. faces a policy choice: Should it continue to rely on housing as an engine of growth? Or is the nation better-served if tax breaks, such as the longstanding home-mortgage interest deduction and short-term programs like the tax credit, are shifted to other sectors/investments?

Despite the excesses and problems stemming from the housing bubble, the public policy needle remains tipped in favor of housing support. Historically, a strong housing market, for both new and existing homes, has closely correlated with a U.S. economic expansion. That's because housing doesn't operate in a vacuum. When homes are sold, the new owners tend to buy durable goods and big-ticket items, such as furniture, appliances, home supplies and so on. Uptrends in these categories are good news for the economy.

Many economists agree that the housing bubble era represented not an indictment of home ownership per se, but of untenable increases in home prices and sales triggered by very low mortgage qualification requirements and speculators, among other factors. Most of those excesses have been purged from the system, returning the sector to growth based on an increase in household formation -- i.e. sustainable demand increases.

Provided those mortgage-induced and speculator errors aren't repeated, and provided the U.S. always views housing as a derivative asset -- it's value is based on the value of something else -- the housing sector will continue to add sustained value to GDP, while also providing many lifestyle and community benefits.