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Is May's Home Sales Decline an Alarming Signal of What's to Come?

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Earlier Tuesday, the National Association of Realtors (NAR) reported the annual rate of existing home sales decreased 2.2% in May, and industry reaction to the results and what the future may hold is decidedly mixed. May is the first month in more than a year the homebuyer tax credit isn't an incentive to lure prospective homeowners into the market, but shoppers that signed a sales contract by April 30 have until June 30 to close the deal and still get the refundable credit — $8,000 for first-time buyers, $6,500 for existing homeowners. The May decline follows upwardly revised monthly increases in April (8%) and March (7%) for closed transactions of existing houses, condos and co-ops. In addition, the NAR previously reported that pending home sales increased 6% month-over-month in April, the latest in a string of increases for that index, including rises in March (7.1%) and February (8.3%). NAR's pending sales index is a forward-looking indicator of future closings based on signed contracts. Deals generally close one to two months after contracts are signed. That data suggested existing sales would jump from the revised estimate of 5.79m in April to 6.2m in May — an increase of 7% — Paul Dales, US economist for Toronto-based Capital Economics, wrote Tuesday. The latest existing sales report "is hard to square" with the pending home sales index, Dales said, "so either signings are being canceled or it is taking longer than usual for a deal to be closed." Existing home sales took an even deeper dive last December, the first month after the $8,000 first-time homebuyer tax credit was originally set to expire on November 30. That month — historically a slow month for home sales — existing sales dropped 16.7% month-over-month. After a rush of first-time homebuyers caused existing home sales to shoot up from September through November, NAR called last year's cliff-diving sales volume an “expected” crash in sales volume. That double-digit decline came even though President Obama had already signed legislation into law that expanded eligibility and extended the credit to its most recent deadline. "The market is going through a period of swings driven by the tax credit,” NAR chief economist Lawrence Yun said in December. “We’ll likely have another surge in the spring as home buyers take advantage of the extended and expanded tax credit.” On the news of May's existing-home sales decline, the NAR blamed at least some of it on a slow down in the closing process. The association is among those in the industry supporting a Senate amendment that would extend the deadline to close to September 30, giving buyers an extra three months to get deals finalized. “Approximately 180,000 home buyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales," Yun wrote in commentary Tuesday. “In addition, many potential sales are being delayed by an interruption in the National Flood Insurance Program. Florida and Louisiana, also impacted by the oil spill, have the highest percentage of homes that require flood insurance.” But not all deals close, and many home shoppers with sales contracts in place may never close because of financing difficulties, according to Sylvia Alayon, vice president of operations at the Consumer Mortgage Audit Center (CMAC), a Fort Lauderdale, Fla.-based due diligence and consulting firm that specializes in mortgage forensic research and analysis. "Lending standards are very, very tight," she said. "We're going to see a huge fallout from individuals that signed contracts, and a good majority of them are not going to be able to obtain financing." Mark Rogers, a senior economist at Lafayette, Calif.-based Econoday projected earlier this month that many pending sales may not have closed by the tax credit deadline and will never close, adding home sales are "almost certain to slump in May." Capital Economics' Dales wrote that if NAR's projections are correct, existing sales are likely to increase sharply in June. But thereafter, existing sales will fall back sharply, and his long-held projection of an impending double dip in housing would then begin. "The tax credit-induced surge in demand is boosting prices," Dales wrote. "That is not too surprising given that the government effectively gave homebuyers an extra $8,000 to spend. "Nonetheless, once home sales fall back to fairly depressed levels, house prices will start declining too," he added. "By the end of next year, we think they will be at least 5% lower." Yun projected that pending home sales will decline in May and June, a cool down from the surge leading up to the tax credit's contract deadline. But, Yun added, job growth and a manageable level of foreclosures are keys to sales and price performance during the second half of the year. Others, like John Burns, CEO of Irvine, Calif.-based John Burns Real Estate Consulting (JBREC) are less optimistic. "This is very bad news," Burns said in reaction to May's numbers. "Sales are going to fall off a cliff in July." CMAC's Alayon agrees, and said the tax credit pulled too much demand forward, and now sales have nowhere to go but down. "Unfortunately, we're not going to see the sharp increase in home purchases and we have been accustomed to in the summer. That spike already happened as a result of the incentive the Administration offered," she said. Alayon said the benefit of a third round of homebuyer tax credits would be minimal, and instead advocates greater incentives to lenders to reduce existing borrower payments through mortgage modifications. The result, she said, would be a reduction in foreclosures that would stabilize housing prices and lure buyers back into the market. "Once you can stabilize housing, then you can generate interest with first-time homebuyers and get individuals that can afford to buy second homes or investment properties because now it makes sense to invest in the market," she said. Write to Austin Kilgore.

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