We have known of a dramatic plunge in mortgage applications in May for at least six weeks, and of the scope of the plunge for almost three weeks now. For some reason, the Associated Press’ analysts couldn’t put -2 and -2 together. Once again using their favorite adverb in the headline, the AP reports on a dramatic fall in home resales:
May home sales unexpectedly fall 2.2 percent
Boost from government incentives appears to be winding down
Sales of previously occupied homes dipped 2.2 percent in May, signaling that a boost from home-buying tax credits is fading sooner than expected.
Last month’s sales fell from the previous month to a seasonally adjusted annual rate of 5.66 million, the National Association of Realtors said Tuesday. Analysts who had expected sales to rise expressed concern that the real estate market could tumble once the benefit of the federal incentives is gone entirely, starting next month.
To be fair, the impact of the tax credit should have extended into May, thanks to the different method of counting home sales between those previously occupied and new construction. The sales needed to close by the end of this month, and previously-owned sales could still have qualified for the credit, Analysts expected home resales to continue rising through the end of this month, but that expectation should have disappeared three weeks ago when the scope of the decline in mortgage applications — over 40%, the lowest level in 13 years — became apparent.
Blooomberg actually expected an announcement of an increase today in May resales, but otherwise sounded a prescient warning:
Existing home sales, which are tallied when transactions close, will rise 6 percent to a 6.1 million annual rate in May, economists surveyed by Bloomberg News forecast before today’s report from the National Association of Realtors. Purchases may hold up in June because buyers still had time to make the June 30 closing date to qualify for the credit. Then, beginning in July, sales will tumble, Shepherdson said.
“The summer is going to be dreadful because the tax credit pulled activity from the summer into the spring,” Shepherdson, the chief U.S. economist at the Valhalla, New York-based research group, said in a telephone interview last week. “New lows do seem entirely possible,” he wrote in a note to clients.
Now it looks even more dreadful than before. That brings us to the Chart of the Day, which once again demonstrates the fecklessness of government intervention in markets:
That dotted line now goes downward, which matches the curve on mortgage applications. In fact, this graph (which is interactive at the Bloomberg link) shows that the sudden drop in resales portends something drastically bad for the rest of the summer, as if the applications numbers themselves weren’t warning enough.
The previous peak in home resales coincided with the first expiration date of the homebuyer tax credit, which did little but to steal demand from later cycles. The credit’s extension didn’t have the same impact, thanks to most cash buyers already taking advantage of the market and the credit earlier. The credits have done little to deflect the overall downward trend in applications, and little to enhance the slight overall gains in the residential resale market. They have, however, introduced a roller-coaster volatility to the market that has interfered with the rational revaluation of residential property for over a year. The only people who haven’t expected this very result are those who have refused to pay attention.