Following the home buyer tax credit driven surge, pending home sales fell a staggering 30 percent with the expiration of the deadline April 30 for qualified buyers to sign a purchase contract, according to the National Association of Realtors®.

Pending Home Sales

The Pending Home Sales Index (PHSI), a forward-looking indicator the housing sector, dropped 30.0 percent to 77.6 based on contracts signed in May from a reading of 110.9 in April, and is 15.9 percent below May 2009 when it was 92.3. The falloff comes after three strong monthly gains as home buyers rushed to take advantage of the tax credit. Here in the Midwest the PHSI index dropped 32.1 percent to 70.8 and is 20.2 percent below a year ago. 

The data reflects contracts and not closings, which normally occur with a lag time of one or two months. As many as 180,000 buyers who signed contracts in April stood to miss the June 30 closing deadline for the tax credit. However, Congress passed ninth hour legislation to extend the deadline for delayed contracts to September 30, 2010. Congress also reauthorized the National Flood Insurance Program. This legislation was responsible for many of the delayed closings as lenders were hesitant to approve mortgages on homes needing flood insurance without congressional action.

NAR chief economist Lawrence Yun said, “Consumers are rational and they rushed to meet the tax credit eligibility deadline in April. The sharp decline in contract signings in May is a natural result with similar low levels of sales activity anticipated in June,” he said. “Existing-home sales that close in June will remain elevated, but we’ll then see a notable decline for July and August.”

Yun noted the tax credit has broadly stabilized home prices.

“Without the tax credit, there will be more aggressive price negotiations between buyers and sellers. The key test on whether the housing market can stand on its own without stimulus medicine will depend critically on private sector job creation in the second half of the year.”

“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.

“In most areas of the country there will be no sharp snap back in home prices in the upcoming years, although some local markets have experienced double-digit gains this year,” Yun said. NAR forecasts the national median home price to rise only 4 percent cumulatively over the next two years.

“One factor that could lead to price acceleration in upcoming years for some markets is if the very low levels of new home construction were to persist for another year or two,” he added.

[contemplate1]

[contemplate2]