March 24, 2017

New Home Sales Drop in January

During January, new home sales declined 12.6%, according to statistics released today [.pdf] from the Housing Department and Census Bureau. After an annual rate of 325,000 new homes sold in December, the annual rate for January totaled 284,000. In addition to this decline, new home sales were 18.6% less than January 2010, reflecting a visible decline over the past year. These monthly and annual declines are primarily due to a combination of expired tax credits for home buyers and a drastic increase in the supply of homes.

During January, new home sales plummeted 37% in the West, which brought down the monthly rate of sales throughout the country. This reduction is due to the expiration of a California tax credit on December 31st that gave new home buyers 5% of the purchase price or a maximum of $10,000. The expiration of this tax credit encouraged purchases before the credit expired and led to a 72% surge of home sales in December, as well as a sharp drop in sales the month after expiration.

A similar pattern is visible on a national scale. New home sales tumbled to record lows after the expiration of the first-time home buyer tax credit on April 30th, 2010. With the expiration of this tax credit, which gave home buyers 10% of the purchase price or a maximum of $8,000, new home sales surged in April, but then they declined 33% the next month and have remained at this level almost every month since April. An influence for this drop-off is prospective buyers who delay a purchase to wait for the passage of a similar tax credit.

On a national scale, home sales were higher in April than any other month in 2010. In California, the only two months in 2010 with annual sale rates above 100,000 were April and December – both of which were months with expiring tax incentives. In both of these instances, home sales declined over a third after the credit expired. As these local and national patterns show, tax credits stimulate sales in the housing market, especially as expiration approaches, but the absence of incentives deters sales when buyers are willing to wait for a bargain.

Though, this likelihood does not necessarily support the passage of a future tax credit, due to the significant impact that such credits have on the fragile housing market. With tumultuous and inorganic activity resulting from these credits, a long-term absence of them in the housing market may encourage a more stable market.

Regardless of whether the government institutes a new tax credit to encourage home sales, another factor leading to the monthly and annual declines in home sales is an enlarged supply of homes. In addition to the 8 month supply of new homes already on the market, the shadow inventory of homes has grown to a third of the residential housing market, which experts estimate will take at least four years to clear. Prospective buyers consequently have plenty to choose from and new homes are probably less economical than existing homes.

Meanwhile, the demand for homes is simultaneously diminishing, due to the high unemployment rate and aging population. An implication of this decreased demand for homes, as well as an increased supply, is a decline in property values, as has occurred for five consecutive months.

Though, lower prices are not enough to rescue the stagnant housing market. Mortgages rates are also relatively favorable, yet this factor is also too minor to yield a housing turnaround. Without exceptional improvements in the unemployment and foreclosure rates, which would eventually alter the worrisome patterns in housing supply and demand, a recovery in the housing market will remain impractical.

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