Expiring tax credits boost new home sales; mortgage rates, falling prices help

By Renae Merle
Thursday, May 27, 2010

New home sales surged last month as home buyers rushed to take advantage of tax credits that have helped lift the housing market, according to government data released Wednesday.

Sales of new single-family homes rose 14.8 percent in April, compared with March, to a seasonally adjusted annual rate of 504,000, according to Commerce Department data. Sales were up 47.8 percent, compared to the same period a year ago. That was a much bigger jump than financial analysts had expected, bringing the sales rate to its highest level in about two years.

Sales rebounded the most in the Midwest, where they rose 31.6 percent. They were up 10.8 percent in the South, which includes the Washington region, and increased 21.7 percent in the West. Sales were flat in the Northeast.

Economists said the report reflects the impact of low mortgage rates and falling home prices, which has made a home purchase cheaper for many potential buyers. The median new home sales price in April fell to $198,400, compared with $219,200 during April 2009.

But the biggest boost, economists said, came from an $8,000 tax credit available to some first-time home buyers and a $6,500 tax credit available to some repeat homeowners who buy a new primary residence. To qualify for the tax credits, a buyer must have entered into a contract by April 30 and complete the transaction by June 30.

The tax credits also helped boost existing home sales, which jumped 7.6 percent in April, according to an industry report released this week. Now that the tax credits have expired, many economists are expecting to see sales activity in both markets begin to slow. The tax credits probably spurred some people planning to buy a house to purchase them earlier, analysts said.

"Overall, this surge in sales may give the economy a short-term boost, not least as households furnish their new homes," Paul Dales, an economist for Capital Economics, said in a research note. "But it will be only a matter of months before a double-dip in the housing market starts to act as a modest drag on economic activity."

The impact of the expiration of the tax credits could be muted by low mortgage rates and improvements in the overall economy, said David Crowe, chief economist for the National Association of Home Builders. "We stole demand from the future, and we will see a plateau [in sales] in May and June," he said.

The inventory of new homes for sale fell 7 percent to 211,000 in April, compared with the previous month -- the lowest level since 1968. At the current sales rate, it would take five months to sell all the homes on the market, down from 6.2 months in March.

"The April sales were even better than builders were expecting, so they sold down inventory they otherwise would have liked to have," Crowe said.

But it also reflects that builders continue to struggle to secure financing to construct homes, he said. "How are they going to supply the oncoming demand?"

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