Tax Credit Spurs Jump in Existing-Home Sales

September existing-home sales jumped 9.4 percent to an annualized pace of 5.57 million, the highest total in two years, according to the National Association of Realtors report. Credit the $8,000 first-time buyer tax credit for most of this gain although an improving economic environment for home buying also contributed. The rush to beat the end of November expiration of the tax credit should keep October and November sales at about the same level. Then sales will dip when the credit expires. There will be a small dip even if Congress extends the credit.
The inventory of unsold existing homes fell 294,000 homes (7.5 percent) last month, dropping the months’ supply of unsold homes to 7.8 million from 9.3 million. While the excess inventory situation is improving it did not improve as much as the raw data suggest. A substantial share of the big drop was due to the artificial spike in sales from federal pump priming and the usual seasonal decline in home for sale listings at the end of the summer.
The months’ supply of inventory needs to drop to about 5 million to cause a clear rise in home prices and a more normal competitive situation for homebuilders with existing homeowners. This still looks likely in mid 2010. Until then, home builders should expect sales gains to be modest overall with some monthly setbacks.
Congress is considering extending the home purchase tax credit beyond November because it is “popular.” This is no surprise. An $8,000 gift from fellow taxpayers is very popular. However, there may now be a majority in Congress that is unwilling to add several tens of billions to the ballooning federal deficit. Extension of the credit is not a certainty, especially with recent reports of substantial fraud in the initial home purchase tax credit claims.
RELATED ARTICLES
Existing-Home Sales Dip Slightly in August
Housing Stall Continues, But Recovery to Resume