Federal Tax Credit Expiration Causes Plunge in Home Sales

Federal Tax Credit Expiration Causes Plunge in Home Sales

The expiration of the Federal Tax Credit for first-time and existing homebuyers has been detrimental to home sales in many markets across the United States.

The decline in sales was far more substantial than economists predicted. Many markets were hit with a decline as much as 25% to 30% in home sales, often twice their expected drop.

While April new-home sales were up 45% from the previous year put the annual home sales rate at 504,000. Weak sales figures for May left many home builders with large stocks of new homes. These builders are likely to reduce the prices on much of this inventory which, could force down home prices in many markets across the nation.

Home sales are not likely to start seeing a significant increase until at least August or September, June and July are expected to show weak sales figures.

Although mortgage rates are low - 4.72% for a 30-year fixed-rate mortgage and 4.17% for a 15-year fixed-rate mortgage as of 6-10-2010 - applications for mortgages were down an estimated 40% in the end of May when compared to a month earlier. According to mortgage bankers, these numbers have fallen to their lowest level in 13 years. Much of this is attributed to the tightening of lending standards. Even though interest rates are at record lows, potential buyers are having difficulty qualifying for a mortgage loan.

Another side effect of May's weak home sales is a large inventory of new homes on the market. According to Zip Realty Inc., of Emeryville, California, home listings have increased 1.7% in 26 major metropolitan areas across the nation. This increase is from April to May of 2010. This rise in new homes on the market is not a common event for the month of May in previous years.

While there were sharp declines in the sale of homes in most markets across the nation for the month of May; markets that typically have homes priced in the millions did not see a dramatic change. Mainly because a tax credit for up to $8,000 is a relatively small incentive to buy a home priced in the millions.

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