TAX NEWS - JUNE 2010

US Tax: Drop in Home Sales in Wake of Tax Credit Tops Forecasts

by JAMES R. HAGERTY and NICK TIMIRAOS, 04 June 2010 -- The withdrawal of federal tax credits for home buyers led to a steeper-than-expected plunge in May home sales in much of the U.S., as the housing market struggles to wean itself from government support.

Economists and real estate analysts expected home sales to slow after the tax credit, of as much as $8,000, expired at the end of April. But early data from real estate brokers indicate that the sales decline has been far more substantial than expected, with some markets showing declines of 25% to 30%.

"Anybody who wanted to buy a house probably did" before the tax credit deadline, said Jay Brinkmann, chief economist of the Mortgage Bankers Association, a trade group.

Housing analysts say that the May slump is ominous but that it's too early to tell whether it portends another serious downward lurch in a market that has generally been leveling off over the past year.

Some recent signs have been encouraging. In April, for instance, the government reported that new-home sales, spurred by the tax credit, jumped 48% from a year earlier to an annual rate of 504,000.

But Ivy Zelman, chief executive of Zelman & Associates, a research firm, estimates that sales of new homes nationwide in May were down 25% to 30% from April. She warns that the weak May performance increases the chances of renewed price cuts by builders caught with too much inventory.

Lawrence Yun, chief economist for the National Association of Realtors, estimated that contracts signed for home resales in May were down 20% to 30% from a year earlier. He expects June and July to remain fairly weak and will be watching nervously for signs of a rebound in August or September. "Housing cannot just depend on [government] stimulus forever," Mr. Yun said.

Now that the housing market isn't benefiting from tax-credit "steroids, we're probably going to see a sluggish second half," said Ronald Peltier, chief executive officer of real estate broker HomeServices of America Inc. Joblessness, or the fear of losing a job, continues to deter many potential buyers, Mr. Peltier said, and the large number of homes in foreclosure or heading that way is still putting downward pressure on prices in many areas.

HomeServices, which owns big real estate brokers in 21 states and is a unit of Berkshire Hathaway Inc., saw its home-purchase contracts signed in May fall nearly 20% from a year earlier, or about twice the decline it was expecting.

Home-purchase contracts signed in New Jersey last month were down 25% from a year earlier, estimates Otteau Valuation Group, an appraisal firm in East Brunswick, N.J.

For all kinds of goods, including houses, "people are saying, 'If it's not a great deal, I'm not going to buy it,' " said Jeffrey Otteau, chief executive of the firm.

New Jersey's state legislature is considering its own tax credit for home buyers. A California tax credit of as much as $10,000, which ends Dec. 31, has helped sustain sales there.

A national survey of real estate agents by Credit Suisse, released Friday, shows that traffic at homes for sale was down in May to its lowest level since the financial crisis of late 2008.

Despite the recent drop in mortgage rates to less than 5%, applications for home-purchase mortgages in late May were down nearly 40% from a month before and have fallen to their lowest level in 13 years, according to the mortgage bankers. Though interest rates are low, many potential buyers still can't get credit because lending standards have tightened.

In the Minneapolis area, the number of newly signed home-purchase contracts in the week ended May 22 was down 30% from a year earlier, according to the Minneapolis Area Association of Realtors. "Our buyers, if they haven't purchased, have just decided to wait," said Brad Fisher, president of the local Realtor group.

In the Phoenix area, contracts signed in May plunged 26% from a year earlier, local Realtor data show. In Denver, the drop was 27%.

In another sign of weak sales, the number of homes on the market is growing again. ZipRealty Inc., Emeryville, Calif., said the number of homes listed for sale in 26 major metro areas across the U.S. in May was up 1.7% from April. In a typical May, the inventory doesn't increase from April, according to Ms. Zelman.

Some markets haven't suffered much from the loss of tax credits. Jonathan Miller, chief executive of Miller Samuel, a New York appraisal firm, said sales had been steady in recent weeks. Tax credits of $8,000 are tiny in comparison to typical Manhattan home prices in the millions of dollars and so had little effect there.

In Florida's Miami-Dade County, home-sale contracts signed in May were up nearly 5% from a year earlier, according to EWM Realtors. Many buyers in Miami are foreigners attracted by huge price cuts there over the past couple of years, said Patrick O'Connell, a senior vice president at EWM.

Toll Brothers, which specializes in higher-priced homes, said home-shopper visits to its communities in May were up 11% from a year ago. "At our price point, the tax credit really did not affect our business," Executive Vice President Douglas Yearley Jr. said at a conference this week.