Will the Tax Credit Bump Create a Summer Slump?

Written by: Steve Cook   Thu, May 27, 2010 Beyond Today’s News, Crisis Programs

Evidence is growing that rather than stimulate additional home sales, the final phase of the tax credit may have only encouraged buyers who were planning to buy a home anyway to move up their purchase a few months so that they could make the April 30 deadline and qualify for the credit. 

Existing home sales were up 14.8 percent in April, but if it is true that the credit encouraged thousands of buyers to make offers in April, the credit could be responsible for a slump in the months to come.

In fact, in the middle of the homebuyer season, when sales should be hottest, there was a steep drop in new home sales in the month of May in both traffic and sales per subdivision in several select Western markets, according to reports from Metrostudy, the Houston-based housing research firm which tracks weekly traffic, contracts, conversions, and cancellations in a selection of markets.

Sales and traffic in Phoenix, Las Vegas, and San Diego pulled back sharply in May, and contract cancellations have spiked (back over 40 percent again in San Diego, up from only 10 percent in April!). During February, March, and April, the Western markets had actually spiked up to the highest levels in three years (comparing the same months of prior years). The spring gains deteriorated substantially in May in most of these markets. Los Angeles has held up pretty well in May so far, but the indicators are nowhere near as strong as they were back in February. Traffic in Las Vegas remains slightly higher than a year ago, but cancellations went up in mid-May, and sales paces have come off of their extremely robust April levels. Other ‘non-bubble’ markets such as Denver and Colorado Springs, have shown a slight pullback so far in May, but not the serious pullbacks that are evident elsewhere.

“A lot of the sales increases we saw in the first part of the year may be the result of this ‘pull forward’ effect that encouraged people who might have waited to buy in April,” said Brad Hunter, Metrostudy’s Chief Economist and National Director of Consulting.

Should Metrostudy’s findings pan out, a post-credit pullback could be underway. with serious implications for summer new and existing home sales.  If some of the new sales that occurred in April were ‘borrowed’ from May, summer is likely to be weak as well.

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