Pending Home Sales Plumment in May

By:: Kara Johnson | July 01, 2010

Pending home sales dropped sharply in May, falling 30 percent following the deadline for signing sales contracts to qualify for the federal homebuyer tax credits.

A drop in new sales had been widely expected following the end of the tax credit program, but the size of the decline took most analysts by surprise. It was the largest monthly decline reported by the National Association of Realtors (NAR) since the group began tracking the data back in 2001, and followed three months of increases as buyers sought to take advantage of the credits.

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

Yun said the key test of whether the housing market will be able to stand on its own without government stimulus will depend on the rate of private sector job creation in the second half of the year. The NAR is predicting an additional 1 million jobs will be created in the second half of the year, on top of half a million to date, with an additional 2 million in 2011.

“If jobs come back as expected, the pace of home sales should pick up later this year and reach a sustainable level of activity given very favorable affordability conditions,” Yun said.

Yun said the tax credits for first-time and repeat homebuyers had helped to stabilize housing prices, but did not foresee any strong recovery in housing prices in the near future. The NAR predicts only a 4 percent increase in prices nationally over the next two years, although some local markets are performing more strongly than others.

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