Housing Market Threatens U.S. Recovery as Sales Slide

June 23, 2010, 10:22 AM EDT (Updates with record decline in new-home sales in second paragraph, stocks falling in fifth paragraph.) By Kathleen M. Howley June 23 (Bloomberg) --

The U.S. real estate market threatens to undercut the Obama administration's stimulus-driven economic recovery as home sales resume their record slide following the end of the federal homebuyer tax credit. New-home sales tumbled 33 percent last month to a record low annual pace of 300,000, the Commerce Department said in a report today. Sales of previously owned homes unexpectedly fell 2.2 percent in May, the National Association of Realtors said yesterday, even as mortgage rates remained near an all-time low. The end of the tax credit in April is putting a strain on a market still hurting from the worst collapse since the Great Depression. Foreclosures may reach 1.9 million this year after a record 2 million in 2009, according to Mark Zandi, chief economist at Moody's Analytics Inc. in West Chester, Pennsylvania. It would take 8.3 months to sell all available 3.89 million existing homes, the Realtors' association said. "We're going to see a home-sales air pocket after the end of the tax-credit stimulus," said Richard DeKaser, a former economist at the U.S. Bureau of Economic Analysis who founded Washington-based Woodley Park Research. "That means housing will be a drag on third-quarter economic growth." The Standard & Poor's 500 Index fell 0.7 percent at 10:12 a.m. New York time, adding to yesterday's 1.6 percent loss, amid concerns that the home-sales data show economic growth isn't strong enough to justify the 6 percent run-up in stock prices in the previous two weeks. Prices Are Crucial "If there is a sharp decline not only in housing sales but in housing prices, that could threaten a recovery," said Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School in Philadelphia. Combined sales of new and existing homes will drop 12 percent in the third quarter from the three months ending June 30, according to a forecast by Fannie Mae, the largest mortgage financier, before yesterday's report. Freddie Mac, which ranks second after Fannie Mae, is projecting a 7.1 percent decline. The median U.S. home price slid 29 percent to an almost eight-year low of $164,600 in February from a peak of $230,300 in July 2006, according to data from the Realtors group. Prices will drop 3.6 percent this year after falling 4.5 percent in 2009, the Washington-based Mortgage Bankers Association estimates. Consumer Spending Lower prices, fewer home sales and a drop in residential construction will sap consumer spending that accounts for about 70 percent of the world's largest economy, according to Woodley Park's DeKaser. "There's a tight relationship between home sales and outlays on furniture, appliances and building materials," he said. "We've already seen some pullback on housing-related items because of the drop in home construction." Sales at U.S. retailers fell 1.2 percent in May, the first decline in eight months, led by a record 9.3 percent plunge at building-material stores, the Commerce Department said June 11. Residential investment -- comprised of home construction, renovation and real estate broker commissions -- will slice 0.03 percentage point from U.S. economic growth in the third quarter before adding 0.4 percentage point in the final three months of 2010, according to IHS Global Insight in Lexington, Massachusetts. 'Tepid Recovery' Such investment boosted GDP by 0.4 percentage point in the third quarter of 2009, the first positive contribution in four years. In the fourth quarter it added 0.1 percentage point. "A tepid economic recovery -- that's what we're going to get, because housing is only very slowly going to return to normal," said Edward Leamer, an economist at the University of California, Los Angeles, and director of the UCLA/Anderson Business Forecast. "We've had a medicated market because of the tax credit and the meds have been removed, so it's going to be difficult to sell homes in the next few months." The homebuyer tax credit of as much as $8,000 required buyers to have a signed contract by April 30 and close on a property by July 1. The credit resulted in 1 million additional home sales from its inception in February 2009 to expiration, according to Lawrence Yun, chief economist of the Chicago-based National Association of Realtors. Rescue Efforts "Without a doubt the economy would be much more sluggish without the homebuyer tax credit," Yun said. The Federal Reserve, in an effort to keep home loans flowing, spent $1.25 trillion to buy mortgage-backed securities. The program, which ended in March, pushed the average U.S. 30- year fixed-mortgage rate to an all-time low of 4.71 percent in December. Last week the rate was 4.75 percent. Unemployment is the main reason housing is weakening without the tax credit to spur demand, Leamer of UCLA said. GDP would have to grow at a 5 percent to 6 percent rate to create "significant reductions" in joblessness, Leamer said. "People won't buy homes when they are worried about their jobs," he said. Home construction and property sales led the way out of the previous seven recessions going back to 1960, according to PMI Group Inc., a mortgage insurer in Walnut Creek, California. New- home sales improved an average of eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery. That didn't happen this time. Sales of new houses fell in five of the eight months before economic expansion began in 2009's second half. Housing starts fell in two of seven months. "This is a recession that was induced by housing, and housing is not going to carry us out like it has done in the past," said Diane Swonk, chief economist of Chicago-based Mesirow Financial Holdings Inc. --With assistance from Bob Willis in Washington. Editors: Larry Edelman, Josh Friedman To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net. To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.