US New Homes Sales Plummeted to a Record Low in May After the Homebuyers’ Tax Credit Expired

New home sales in the US plummeted by a record 32.7% from 446,000 units in April (revised from the initially reported 504,000 units) to a record low annual pace of 300,000 units in May, the first month following the expiration of the Federal government’s homebuyers’ tax credit. Market expectations going into the report were for a more modest 18.7% decline.

May marked the first month of sales activity following the expiration of the Federal government’s homebuyers’ tax credit that required contracts to be signed by April 30. New home sales are recorded when the buyers sign the contract, whereas existing home sales are recorded at the close of the transaction, and as such new home sales provide a more timely gauge of the effect of the removal of this purchase incentive on the housing market. The extreme weakness was seen across all regions, with the West (-53.2%), Northeast (-33.3%), South (-25.4%) and Midwest (-23.9%) all posting significant declines.

Inventories, as measured by months’ supply of unsold homes on the market at the current sales rate, rose to 8.5 in May from April’s 5.8 (revised from 5.0) in the face of the very weak level of sales representing the highest level since June 2009, although still well below the recent peak of 12.1 set in January of 2009. In absolute terms, however, the number of unsold homes continued the general downward trend seen since the summer of 2006, edging down to 213,000 in May from April’s 214,000 (revised from 211,000) level.

Today’s new home sales report does little to assuage fears that the housing market would lose momentum without the support of the Federal government’s tax credit and continues the slew of negative data coming from the market. Recent reports on building permits, housing starts, mortgage applications, foreclosures and builders’ confidence have all indicated considerable weakness. Without the aid of the tax credit, it appears likely that the housing market will remain cool until further improvements are seen in the labour market. Given this backdrop and muted inflationary pressures, we continue to expect that the Fed funds rate remain in its currently highly stimulative range of 0% to 0.25% until late this year.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.