Anticipated end of homebuyer tax credit hits Dec housing

New homes, builders struggle

December’s drop in housing sales came as no surprise, only the magnitude of the decline caught some off guard.  Given that an $8,000 tax credit for first time buyers had never expired before, forecasting its impact is a bit difficult so let’s not be too harsh on the forecasters who took a stab at it.

Existing home sales in December plunged 16.7% to a seasonally adjusted annual rate of 5.45 million units in December from 6.54 million in November but remain 15.0% above the 4.74 million-unit level in December 2008. 

It’s pretty obvious that potential homebuyers rushed to beat the November 30 deadline to close in what had previously been the expiration of the credit.  Congress has since expanded and extended the cash incentive.

What’s unclear is how much the credit caused buyers to move up planned purchases, and how many fence sitters made their decision based on the credit.

Sales were clearly borrowed from future months, but low interest rates and the extension and expansion of the credit is expected to fuel sales again in the spring. Increased job security and hiring would go a long way toward building a solid foundation under the housing market.

New home sales come under pressure, builder sentiment slides

Sales of new  homes, however, have struggled.  Sales fell a greater-than-expected 7.6% to an annual rate of 342,000 units in December.  More troubling, new  home sales are down in five of the past six months.  And sentiment among builders reflects what’s been going on with sales.

As noted from the chart above, the Housing Market Index, which measures sentiment among builders, remains well above the extreme lows seen early last year but has been been weakening recently.

Housing starts are no longer declining, thanks to sales that have also ended their downward spiral. But builders have not shared equally in the housing recovery so far. Note: existing home sales surged in late summer and early fall.

If there is a silver lining for builders, permits, which are a good forward-looking indicator, jumped last month, but it’s going to take more than just one good month to solve the many problems still facing the nation’s builders.

From an economic standpoint, new homes means new construction. And that will help spur economic activity.  Existing home sales,  however, make up over 90% of all sales, helping to support prices that have sagged over the past two years.