Home purchase contracts signed in May dropped to their lowest level in the history of the Pending Home Sales Index. Contracts fell to a level of 77.6\, 30 percent below April and 15.9 percent below May 2009.
Not only was the 30 percent month-over-month decline the largest on record, the level of the index itself is nearly 25 percent below the average level of contract activity during 2001, nearly a decade ago, the standard on which the PHSI is based.
The dramatic plunge in contracts on homes, about 15 percent of which probably won’t close, provides further evidence that the credit will be followed by a severe downturn in demand that could last through the summer and cripple the housing recovery. The Federal homebuyer tax credit encouraged thousands of buyers to move their purchases forward to qualify for the credit, which ended April 30.
The May Pending Home Sales Index dropped 30.0 percent from 110.9 in April, when it was 92.3.
The data reflects contracts and not closings, which normally occur with a lag time of one or two months. However, many closings have been delayed recently from a rush of buyers into the system and slow processing of short sales, in addition to the heavy volume and a more thorough loan underwriting process. As many as 180,000 buyers who signed contracts by April 30 may have missed the June 30 closing deadline for the tax credit. However, Congress passed legislation yesterday to extend the deadline for delayed contracts.
“We are once again struck by the force of the drop,” said Dan Greenhaus, chief economic strategist at Miller Tabak + Co. “There is simply no other way to spin the recent housing data as anything other than significantly worse than virtually anyone, including the housing bears – a group in which we find ourselves – envisioned.”
The dramatic drop in sales fueled talk in many quarters of a double dip housing recession rather than a straight line recovery.
“Folks are beginning to wonder what’s going to happen to the rest of the economy as all this stimulus starts to wind down,” says Mark Vitner, an economist at Wells Fargo & Co. “They’re finally waking up to the fact that the second half of the year is going to be slower.”
NAR’s Lawrence Yun said, “The key test on whether the housing market can stand on its own without stimulus medicine will depend critically on private sector job creation in the second half of the year. We’ll also keep a close eye on market conditions on the Gulf Coast.” Yun noted that two markets in the nation, Portland, Maine, and Jacksonville, Fla., actually experienced an increase in contract signings from a year ago.