New Home Sales Plunge Following Expiration of Homeowner Tax Credit

Once again, the writing was on the wall. Just yesterday, existing home sales dropped in May and some of that drop can be attributed to the expiration of the homeowner tax credit. Now, new home sales dropped a whopping 33% in May (link added).

This once again exposes the serious weakness in the real estate market and that there simply aren't buyers for the homes that are on the market. People simply aren't buying homes because they aren't comfortable with their financial positions and/or that they are unable to obtain the necessary credit to make those purchases.

The net result of the massive drop in new home sales is that the homebuilders and manufacturers are going to take a significant hit, with the ripple effect hitting across home furnishings and even the home improvement center businesses. Still, that could lead to some improvement for companies like Home Depot or Lowes because people will seek to improve their existing homes rather than buying new.

At least, that's what those businesses are hoping for - because the real estate market doesn't look like it is going to improve anytime soon.

Moreover, it looks like the homeowner tax credit proved itself to be an absolute bust - shifting meager sales from one tax period into another. It largely cannibalized sales that would have otherwise occurred and did not actually affect the underlying economics. The credit was badly designed and did little to improve matters.

UPDATE:
In a related article, it appears that there was significant amounts of fraud in connection with the homeowner tax credit involving criminals and others who were not eligible in obtaining the credit. More than 1,000 criminals, many serving life sentences, were able to get the credit:

"Additional controls are necessary to address erroneous claims for the credit," the report stated. "Further, fraudulent and questionable claims processed prior to implementation of controls will need follow-up action by the IRS."

According to the report, 4,608 state and federal inmates filed for these tax credits, and that fraudulent refunds were doled out to 1,295 of them.

The inspector general's report said the most "egregious" fraudsters were 715 prison lifers, including 174 who filed with the help of paid preparers. From this group, 241 lifers were awarded $1.7 million.

UPDATE:
The new housing figures are even worse than advertised considering that the March and April figures were also revised sharply lower.

The Commerce Department said on Wednesday single-family home sales tumbled to a 300,000 unit annual rate, the lowest level since the series started in 1963.

In addition, April and March sales figure was revised down to 446,000 units and 389,000 units respectively. The drop in sales in May unwound two months of gains, which had been inspired by a government tax credit for home buyers.

Prospective home owners had to sign contracts by April 30 to qualify for the tax credit. Analysts polled by Reuters had forecast new home sales sliding to a 410,000 unit-pace. New home sales are measured at contract signing.

"The previous two months were revised down, so the lift from the tax credit was less than we previously realized. We are getting a little nervous," said David Sloan, an economist at 4Cast in New York.

In fact, it appears that the homeowner credit did nothing to improve sales during the period and that any increase in sales during the spring was due entirely to the usual seasonal uptick in real estate transactions.

There is no real way to spin this as a positive, despite Sloan's attempt to give positive attributes to the credit's operation and expiration.

UPDATE:
MSNBC now gives a sob story excuse that the reason that home sales have dropped off a cliff is because banks are now demanding more documentation and more intrusive records from prospective borrowers. I'm sorry, but what the heck is wrong with MSNBC? The reason that the markets melted down was because people who should never have been approved for loans were getting them and no one seemed to care about credit histories, risk, or whether a potential borrower had the capacity to repay.

Now, banks are far tougher than they were during the height of the runup in real estate and that's a bad thing? Sorry, but that's exactly what real estate needs right now - it needs the banks to be serious about determining risk and weeding out the borrowers who can afford loans from those who shouldn't be extended the credit.

It's absolutely vital to getting a handle on personal debt and bringing fiscal sanity to the real estate markets.