Home sales declined unexpectedly in May, even as federal stimulus efforts kept transaction levels artificially elevated.

Existing home sales slipped 2 percent in May from April but remained 19 percent above year-earlier levels, the National Association of Realtors said Tuesday. Despite the decline in sales, home prices were firm. Nationwide, the median home price increased 3 percent, to $179,600, from May of 2009. The months' supply of unsold homes, meanwhile, fell slightly to 8.3 from 8.4 in April.

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The dip in sales came as a surprise to economists, who had predicted a 6 percent increase in May. Optimism had been fueled by an earlier NAR report showing that pending home sales had increased in April for the third straight month. Pending home sales -- which reflect contracts signed but not yet closed -- began rising early this year as buyers scrambled to take advantage of a federal tax perk. The Obama administration in February 2009 began offering tax credits worth up to $8,000 for qualified first-time homebuyers. The program was eventually extended and expanded to include even certain current homeowners who signed a sales contract by April 30 and closed their transactions by the end of June.

"Most analysts thought there would be a spike upward in existing home sales in May due to the expiration of the new homebuyer tax credit at the end of June," Brian Wesbury, chief economist at First Trust Portfolios, said in a report.

Celia Chen of Moody's Analytics says that the slide in existing home sales -- which are tallied at closing -- may simply reflect a slowdown in the mortgage financing process. "Learning from their mistakes earlier in the decade, mortgage lenders are carefully processing applications, making sure that all the i's are dotted and t's crossed," Chen said in a report. "Still-tight lending is slowing the approval process, and this may also be slowing the flow of home sales that are closing."

NAR says an issue related to flood insurance is gumming up the system as well. "Many potential sales are being delayed by an interruption in the National Flood Insurance Program," NAR Chief Economist Lawrence Yun said in a statement. "Florida and Louisiana, also impacted by the oil spill, have the highest percentage of homes that require flood insurance."

To provide consumers with additional time to complete their transactions, NAR is supporting a measure working its way through Congress that would push back the date by which consumers would have to close their purchase in order to qualify for the tax break. The measure would extend the deadline to September 30.

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Still, Chen expects next month's existing home sales report to show renewed strength. "Most of these waiting buyers will eventually obtain mortgages, and sales should pick up in June," she said. "Even if no extension is passed, it is likely that after putting down a substantial chunk of cash as down payments, these buyers will go through with their purchases even if they miss the deadline for the tax credit."

But with the boost from the tax credit over, sales are expected to slide in the third quarter. And a sustainable recovery in the housing market can only materialize if the labor market rebounds, says Mike Larson of Weiss Research. "We still have cheap homes and cheap mortgages there for the taking. We just don't have a lot of buyers willing or able to step up to the plate," Larson said in a report. "That will likely remain the case unless and until we get some momentum in the job market."

Patrick Newport of IHS Global Insight agrees.

"Home sales have been riding a two-hill roller coaster because of the two tax credits," Newport said in a report. "After a midyear drop, our view is that sales will start growing sustainably as the job market improves."

 

 

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