By Dina ElBoghdady
Washington Post Staff Writer
Thursday, June 24, 2010; A18

Sales of newly built homes plunged in May to their lowest level in more than four decades after a lucrative tax credit expired, draining demand for home purchases in all four regions of the country.

The Commerce Department reported Wednesday that sales of new single-family homes dropped 32.7 percent in May from the previous month, to a seasonally adjusted annual rate of 300,000. Analysts surveyed by Bloomberg had predicted a decline of 18.7 percent.

The percentage drop was the largest monthly decline since the government started tracking the numbers in 1963. The annual rate was also the lowest on record. New-home sales fell by double digits in every part of the country, led by a 53 percent drop in the West. Even compared with a year ago, new-home sales were down by 18.3 percent.

Although new-home sales are dwarfed by activity in the existing-homes market, they are closely watched because the construction industry contributes to job creation and economic growth.

The dismal May sales results add to disappointing housing data that suggest buyers are retrenching, possibly because fears about job security are trumping today's tantalizingly low mortgage rates and home prices. Industry reports show that also fell in May as mortgage applications continued to sink.

Many economists say the expired tax credit is distorting the latest housing numbers. To qualify for the credit, buyers had to sign a contract by April 30 -- complicating efforts to gauge the housing market's health in May. The thinking is that the tax credit lured people into buying homes sooner than they had planned, thereby eating into May sales.

"The tax credit expired as the peak home-buying season kicked off," said Mark Vitner, senior economist at Wells Fargo Securities. "Imagine what would happen to retail sales if they canceled Christmas."

The sales numbers are adjusted to remove seasonal variations so economists can spot the underlying trend on a month-to-month basis. Sales would typically rise in May. But instead, they dropped and the seasonal adjustment exaggerated the declines in sales and prices, said Stuart Hoffman, chief economist at PNC Financial Services Group.

The government's report shows that the median price of new houses sold in May was $200,900, down 1 percent. The average price fell 0.7 percent, to $263,400.

"It will not be until later this fall and winter that we will start to get a 'clean read' on the condition of the housing market," Hoffman wrote in a note to clients.

Economists also said the number of new homes sold in any given month is so small that slight changes can register as big percentage differences, making the monthly data volatile.

The new-home sales figures capture only the number of contracts signed in May, not the number of contracts closed.

To take advantage of the tax credit, buyers who signed a contract by April 30 must close on it by June 30. Senators have proposed to Sept. 30 because of reported delays in the processing of mortgage applications, including problems with home appraisals.

The report's only upbeat figures involve the supply of new homes, which fell slightly, from 214,00 in April to 213,000 in May, the lowest level since November 1970. Getting rid of excess supply is key to stabilizing prices. But new homes are taking a long time to sell, with more than half lingering on the market for at least 14 months, the report says. In a healthy market, 5 months would be the median time, according to IHS Global Insight.

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