Pending Home Sales Plunged in May

Mixed results for two key economic statistics in May: Construction spending fell less than expected, but pending home sales plunged.

First the relatively good news: Construction spending dipped 0.2% in May, the U.S. Commerce Department announced Thursday, a reading that was considerably smaller than the 0.5% decline expected by a Bloomberg survey. Given April's 2.3% surge in construction spending, a mild pullback was expected. In May, private residential construction spending fell 0.4% and private non-residential construction spending fell 0.8%.

However, as in April, public construction spending, which includes fiscal stimulus infrastructure and related projects, bolstered the May total, rising 0.4% after a 1.6% jump in April.

Pending Home Sales Plunge After Tax Credit Expires

Now the bad news: Pending home sales plunged 30.0% in May, the National Association of Realtors announced Thursday, as the number of homes heading to a closing declined as the end of the homer buyer tax credit approached on April 30.

The May pending home sale swoon follows three strong months of pending home sale gains -- further evidence that the home buyer tax credit encouraged some prospective home buyers to buy a home sooner, and increased home sales. Lawrence Yun, NAR chief economist, argued that the May pending home sales plunge was expected, rational and natural.

"Consumers are rational and they rushed to meet the tax credit eligibility deadline in April," Yun said, in a statement. "The sharp decline in contract signings in May is a natural result with similar low levels of sales activity anticipated in June."

Yun added that, provided job growth ensues in the months ahead, the pace of home sales should pick up later this year and reach a sustainable level, due to "very favorable [home] affordability conditions."

In May, pending home sales plunged in every region. Sales plummeted 31.6% in the Northeast, plunged 32.1% in the Midwest, sank 33.3% in the South, and swooned 20.9% in the West.

In general, economists view existing home sales as a more-accurate indicator of housing sector activity than pending home sales, due to the number of pending home sales that fall through, as a result of mortgage problems, title issues, liens, and other complications that sometimes prevent signed housing contracts from being finalized.

In sum, May's construction and pending home sales data comprise a microcosm of the U.S. economy at this stage of the recovery. Fiscal stimulus, either in the form of infrastructure spending by federal and local governments or via the home buyer tax credit, have helped stabilize construction spending and home sales. However, it remains to be seen whether the U.S. economy has enough demand in the system to advance to a self-sustaining expansion in the quarters ahead.