U.S. housing market remains fragile despite low mortgage rates

Bar chart showing pending homes sales
By Dina ElBoghdady
Washington Post Staff Writer
Friday, July 2, 2010

After showing signs of a fledgling recovery from the worst downturn in decades, the U.S. housing market appears to be heading back toward the doldrums, as the expiration of a lucrative tax credit for buyers and increased uncertainty about the economy cause home sales to plummet.

The sudden weakness in residential real estate has struck nearly every region of the country, according to recent government and industry data, driving down sales of new and previously owned homes alike in May. On Thursday, the National Association of Realtors said an index that measures sales contracts signed on existing homes plunged 30 percent in May, more than twice what analysts had forecast, to the lowest level since the group started tracking the numbers in 2001.

Those sharp declines come despite record-low mortgage rates and historically cheap home prices. The market's renewed fragility highlights concerns about whether the U.S. economy will hurtle back into recession and illustrates the impact of the nation's high unemployment rate, now at 9.7 percent. On Friday, the government will issue jobless figures for June that could signal what is in store for housing and economic growth.

As long as people are without jobs or fear losing their livelihoods, they are unlikely to commit to buying a home and saddling themselves with 30 years of mortgage payments.

"It sounds simplistic but it bears repeating: 'No job = No house,' " Mike Larson, an analyst with Weiss Research, wrote in a note to clients Thursday. "With so many Americans unemployed or underemployed, the housing market is going to keep hurting."

In a report last month, Harvard University's Joint Center for Housing Studies singled out high joblessness as "one of the biggest drags" on the market. Based on past downturns, the report concluded that job growth is highly correlated to a sustained housing recovery, even more so than falling mortgage interest rates.

Many housing analysts are rethinking their predictions for the market's performance for the year. More than half of the 106 economists and analysts surveyed by Macromarkets in June said they expect a dip in home prices; that's up from 40 percent in May.

Despite the flash of pessimism, many economists expect the market to stabilize, but they won't have a clean read on its direction until the fall or winter, when the lingering effects of the tax credit clear the system.

That credit, which expired April 30, heavily distorted normal home sales patterns by enticing people to buy homes earlier than they had planned, thereby eating into future sales, economists said.

"The tax credit was like a Band-Aid over the housing market," said Mark Vitner, a senior economist at Wells Fargo Securities. "Now that the Band-Aid has been ripped off, we've found that the wound has not quite yet healed."

Surprising drops

Home sales were expected to decline once the credit ended, but May's acute drops have surprised many analysts. If the trend continues through the rest of the year, it could upend the market's tepid rebound and undermine the broader economy.

The unsteadiness is further reflected in the fact that the average rate on a 30-year fixed-rate mortgage hit a record low of 4.65 percent this week, but applications for home-purchase mortgages were down for all but one of the past eight weeks, slipping 3.3 percent last week, according to industry data.

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