by Luke Mullins

Americans signed far fewer contracts to buy homes than expected in May, the real estate market's first month of functioning without a key federal stimulus.

The Pending Home Sales Index, which measures sales contract signings, fell 30 percent in May from April to a new record low, the National Association of Realtors (NAR) said Thursday. Although economists had expected contract signings to decline in the month immediately following the expiration of the federal home buyer tax credit, the drop was more than twice as steep as projected.

"If you're looking for a silver lining in housing, you aren't going to find it here," Mike Larson of Weiss Research said in a report. "Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever." (NAR has tracked this data since 2001.)

The federal home buyer tax credit was enacted by President Obama in early 2009 in an effort to revive the struggling real estate market. The initiative offered up to $8,000 in tax breaks to qualified home buyers who signed a sales contract by April 30 and closed the transaction by the end of June. As a result, the pending home sales index increased in the three months through April as buyers pushed up transactions that would have otherwise taken place in later months in order to get their hands on the credit. This pull-forward effect, however, worked to undercut housing demand in the weeks immediately following the deadline.

"We now expect the index to remain close to the May level for a couple of months before a gradual rebound begins in the fall," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a report.

Zach Pandl, an economist at Nomura Securities, says that Thursday's data means that existing home sales are likely to fall sharply July, the first month after the June 30 deadline by which buyers have to close their transactions to remain eligible for the credit. (Existing home sales are tallied at closing.)

But Pandl says the timing of the decline may be altered by new legislation. Late Wednesday, the Senate passed a bill pushing back the closing deadline from June 30 to September 30 in order to give home buyers additional time to complete their purchases. Only buyers who already signed a sales contract by April 30 can take advantage of the extension. A NAR spokesman said the president's signature on the bill is imminent.

"We now have clear evidence that existing home sales are going to fall, it's just a question of when," Pandl says.

Tax credits aside, today's home buyers still have plenty of incentives to jump into the market. Real estate prices have fallen sharply from the heights reached during the housing boom. Meanwhile, 30-year fixed mortgage rates fell to 4.58 percent for the week ending July 1.

But with the unemployment rate still just below 10 percent, the labor market remains a key obstacle to the reformulation of housing demand, Larson says.

"The overall economy is rolling over, consumer confidence is slumping and, most importantly, we just aren't creating jobs," he said in a report. "With so many Americans unemployed or underemployed, the housing market is going to keep hurting."

Home Sales Poised to Drop in Coming Months