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Pending Home Sales Tumble 30% in Wake of Tax Credit Expiration

In an expected but unwelcomed change of events, pending home sales plummeted in May following the expiration of the homebuyer tax credit, the ""National Association of Realtors"":http://www.realtor.org/ (NAR) reported Thursday.


NAR's ""Pending Home Sales Index"":http://www.realtor.org/press_room/news_releases/2010/07/phs_drop (PHSI), a forward-looking indicator based on contracts signed during the month, fell to 77.6 in May as the government incentive to buy a home vanished. The May 2010 index tumbled 30 percent from 110.9 the month prior and dropped 15.9 percent from May 2009's level of 92.3.

This significant falloff came on the heels of three strong monthly gains in pending home sales. According to NAR, the temporary surge in sales was the result of buyers rushing to sign contracts before the April 30 deadline of the extended and expanded homebuyer tax credit.

""Consumers are rational and they rushed to meet the tax credit eligibility deadline in April,"" said Lawrence Yun, NAR chief economist. ""The sharp decline in contract signings in May is a natural result with similar low levels of sales activity anticipated in June.""


Although pending sales have declined, Yun noted that the tax credit has broadly stabilized home prices. He said without this credit, there will be more aggressive price negotiations between buyers and sellers.

According to Yun, the key test on whether the housing market will be able to stand on its own without stimulus medicine will depend critically on private sector job creation in the second half of the year. Through May of this year 495,000 net private sector jobs have been created, and NAR expects a net of about 1 million new jobs to be added over the balance of the year and another 2 million in 2011.

""If jobs come back as expected, the pace of home sales should pick up later this year and reach a sustainable level of activity given very favorable affordability conditions,"" Yun said.

While pending home sales fell on a national basis, Yun said some local markets such as Portland, Oregon; Maine; and Jacksonville, Florida actually experienced an increase in contract signings from a year ago without the tax credit. But when looked at on a larger regional basis, the PHSI fell across the board.

The most notable decline was seen in the South, where pending home sales plunged 33.3 percent from April and were 14.4 percent lower than May 2009. The PHSI in the Midwest index dropped 32.1 percent from the month prior and was 20.2 percent below a year ago. The index in the Northeast fell 31.6 percent on a month-to-month basis and was 14.8 percent lower than May of last year. In addition, the PHSI in the West slumped 20.9 percent from April and was 15.1 percent below the same month last year 2009.

About Author: Brittany Dunn


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