New home sales jumped 14.8 percent in April as homebuyers rushed to claim the tax credit that expired at the end of the month. The March numbers were revised upward as well, according to a national real estate study foundation. The seasonally-adjusted annual rate was 504,000.
The homebuyer tax credit, which expired April 30, boosted sales since buyers had to sign contracts by the end of last month. First-time homebuyers qualified for a tax credit up to $8,000, while repeat buyers could get as much as a $6,500 credit.
So the question is: What happens to sales after the tax credit effect goes away? Our data can shed some light.
Metrostudy tracks weekly traffic, contracts, conversions, and cancellations in a selection of markets, and our research shows that there was a steep drop in the month of May in both traffic and sales per subdivision in several ‘bubble markets.’ Sales and traffic in Phoenix, Las Vegas, and San Diego pulled back sharply in May, and contract cancellations have spiked (back over 40 percent again in San Diego, up from only 10 percent in April).
During February, March, and April, the western markets had actually spiked up to the highest levels in three years (comparing the same months of prior years). The spring gains deteriorated substantially in May in most of these markets. Los Angeles has held up pretty well in May so far, but the indicators are nowhere near as strong as they were back in February. Traffic in Las Vegas remains slightly higher than a year ago, but cancellations went up in mid-May, and sales paces have come off of their extremely robust April levels.
Other ‘non-bubble’ markets such as Denver and Colorado Springs, have shown a slight pullback so far in May, but not the serious pullbacks that are evident in those other markets.
Based on this research, it seems that a post-credit pullback is under way. The summer is likely to be weak because some of the sales that occurred in April were ‘borrowed’ from May, and probably also from June, and July.
Later in the year, new home sales will most likely pick up once again. Continued gradual improvement in the economy should provide a foundation for improvement later this year or next year.
The new S&P/Case-Shiller index showed that home prices fell 3.2 percent quarter-over-quarter but still managed to climb 2 percent year-over-year. Here is the complete CNN story which features some of our analysis: http://bit.ly/bk6X5i
The primary reasons we are still expecting price declines is that defaults of prime loans are still rising, and a wave of ‘option-ARM’ defaults is expected this year and next. Also, the pace of foreclosures and the flow of REO into the market had been artificially restricted during the past year, and that is about to change.
The important thing to point out, though, is that the defaults and REO competition will be more significant in certain markets and submarkets than in others. As an example, more than half of the option-ARM loans written nationwide were written in California; 13 percent were written in Florida, which has the second-highest concentration. And within California and Florida, there is going to be a big difference in price trajectories among markets and submarkets. It is more vital than ever to look at housing at a local level.
Brad Hunter writes for Metrostudy real estate study group.