Business Week Report as of January 25, 2010
By Courtney Schlisserman
Jan. 25 (Bloomberg) -- Sales of existing U.S. homes plunged more than anticipated in December, showing the dependence of the housing market on a government tax credit.
Purchases slumped 17 percent the month after a government tax credit was originally due to expire, the biggest decline since records began in 1968, to a 5.45 million annual rate, the National Association of Realtors said today in Washington. The median sales price increased for the first time in two years.
First-time buyers rushed to complete deals before the $8,000 government incentive was due to end, pushing sales up 28 percent in the three months to November. The subsequent extension and expansion of the credit to include closings through June signal demand will strengthen in the first half of 2010, while raising the risk the market will then slow anew should jobs remain scarce.
“We’ll see a pickup in existing home sales in the next couple of months,” said Adam York, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who forecast a 5.4 million sales pace. Although “we’re past the bottom,” he said, “I don’t think there’s going to be a lot of buyers out there looking for a home outside of the tax-induced effects until they feel more comfortable with the labor market.”
Stocks trimmed earlier gains following the report. The Standard & Poor’s 500 Index was up 0.5 percent to 1,097.66 at 12:01 p.m. in New York. The S&P Supercomposite Homebuilder Index was down 0.6 percent.
Less Than Forecast
For all of 2009, existing home sales rose 4.9 percent to 5.16 million, the first gain in four years, from 4.91 million in 2008. The median price last year was $173,500, down 12 percent from 2008, the biggest annual drop on record and probably the largest since the Great Depression, NAR chief economist Lawrence Yun said in a news conference.
The median value in December was $178,300, up 1.5 percent from the same month in 2008. The increase was the first since August 2007 and the biggest since May 2006, the agents’ group said. A decline in the number of first-time buyers, who usually purchase less expensive houses, helped push up the median value last month, Yun said.
First-Time Buyers
The share of homes sold to first-time buyers fell to 43 percent in December from 51 percent the prior month, Yun said, indicating the expected end of the tax credit played a role in the drop in sales.
President Barack Obama and Congress extended the first-time buyer credit in early November to cover deals signed by April 30 and closed by June 30, and expanded it to include current homeowners. Even so, some economists believe the original measure pulled sales forward, restraining demand for a few months.
Yun said he was “generally pleased” with the December outcome since he feared an even larger drop following the expected expiration of the tax credit. “There is an increase in home-buyer confidence,” he said, adding “there is some sustainable momentum” in sales. Even with the decline, sales were still up 15 percent from the same month last year, signaling a general improvement, he said.
The number of previously owned homes on the market decreased 6.6 percent to 3.29 million, the lowest level since March 2006. At the current sales pace, it would take 7.2 months to sell those houses, compared with 6.5 months at the end of November.
Fed Action
The end of Federal Reserve purchases of mortgage-backed securities aimed at keeping borrowing costs low represents a challenge for the industry. The program is scheduled to expire by March 31.
Policy makers are scheduled to meet this week to discuss the direction of the benchmark lending rate between banks. The emergency programs were being wound down “in light of ongoing improvements in the functioning of financial markets,” central bankers said in their Dec. 16 statement.
Joblessness and foreclosures are other concerns. Unemployment is forecast to average 10 percent this year, the highest level in seven decades. A record 3 million U.S. homes will be repossessed by lenders this year, RealtyTrac Inc. forecast on Jan. 14. That is up from 2.82 million in 2009, the most since the company began compiling data in 2005.
Competition with foreclosures has been especially daunting for homebuilders. KB Home, the Los Angeles-based homebuilder that sells to first-time buyers, said Jan. 12 that fourth- quarter revenue dropped 27 percent.
KB Home’s orders rose 12 percent to 1,446 from 1,296 in the year-earlier quarter, while completed sales dropped 22 percent to 3,042. The company is “not going to make money in the first quarter” and plans to “restore profitability” in the second half of 2010, Chief Executive Officer Jeffrey Mezger said Jan. 12 in a conference call with analysts and investors.
--With assistance from Oshrat Carmiel in New York. Editors: Carlos Torres, Vince Golle
To contact the reporter on this story: Courtney Schlisserman in Washington at +1-202-624-1943 or cschlisserma@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at +1-202-624-1862 or cwellisz@bloomberg.net
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