Home Sales Drop 2.2% Despite Expiring Homeowner Tax Credit

Even the homeowner tax credit couldn't stop home sales from slipping another 2.2% in May.

The National Association of Realtors says last month's sales fell to a seasonally adjusted annual rate of 5.66 million. April's results were revised upward to 5.79 million. Economists polled by Thomson Reuters had expected sales to rise to a rate of 6.12 million.

The federal government had boosted home sales by offering buyers tax credits of up to $8,000. The deadline to get a signed sales contract and still qualify was April 30. Buyers must close their purchases by end of this month.

The economists were off by 460,000 homes (an 8% error).

The problems in the real estate market are much more fundamental than simply giving $8,500 to new homeowners or $6,500 to existing homeowners buying another primary residence.

It has to do with a lack of buyers who can obtain the necessary credit to buy homes and that prices in some parts of the country still haven't sufficiently adjusted to the reality of lower demand for housing. In other words - prices aren't sufficiently affordable in some parts of the country, even where prices have dropped precipitously and there's a lack of buyers.

A good portion of existing homeowners are underwater on their mortgages, making it all the more difficult for them to pack up and move to a new home, even if it is a downsized home. They have to make up the difference. Banks aren't going to renegotiate mortgages in all those circumstances either - and the loan modification programs instituted by the federal government that directs banks to readjust mortgages for those facing defaults isn't helping either.

A significant portion of those who have had their mortgages modified are redefaulting because their employment situations are unsettled or that their mortgages still don't reflect a sustainable situation.

Throw in the continuing tight credit and tougher credit requirements for homeowners and you have a shrinking pool of buyers, which is further pressuring sales (and prices) downward.

Under those conditions, those people with good credit and that can afford to buy a home are in a good position because they have the bargaining power to demand more from sellers who are looking to get out from their situations.

And the media really needs to stop with the "unexpected fall" nonsense. Anyone following the real estate market knows or should know that the market is weak and that drops should be expected - not increases. If anything, an increase in real estate sales would be unexpected - not that there is continuing weakness and drops in sales.