June 22 (Bloomberg) -- Sales of U.S. previously owned homes unexpectedly fell in May, a sign demand was probably pulled into prior months before a June tax-credit deadline. Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.
The decline raises the risk the retrenchment following the expiration of the tax credit will be deeper than anticipated. A slump in builder shares since late April has exceeded the retreat in the broader market on concern the damage from the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness.
“Housing is extremely weak and vulnerable,” John Herrmann, a senior fixed-income strategist at State Street Global Markets in Boston, said before the report. “We’re heading into a soft patch.”
Existing home sales were forecast to rise to a 6.12 million rate, according to the median forecast of 74 economists in a Bloomberg News survey. Estimates ranged from 5.2 million to 6.5 million. The group revised April’s sales rate up to a 5.79 million pace from the 5.77 million rate previously reported.
Purchases of existing homes increased 2.7 percent compared with a year earlier prior to adjusting for seasonal patterns.
The median price increased 2.7 percent to $179,600 from $174,800 in May 2009.
Inventory Elevated
The number of previously owned homes on the market dropped 3.4 percent to 3.89 million. At the current sales pace, it would take 8.3 months to sell those houses compared with 8.4 months at the end of the prior month.
Climbs in inventories have slowed in recent months, posing a risk for the market, Lawrence Yun, the group’s chief economist said in a press conference.
Federal Reserve policy makers, who begin a two-day meeting today, are forecast to commit to keeping interest rates near zero to help wean the world’s largest economy off government stimulus. The hazard posed by the European debt crisis, joblessness and a lack of inflation add to the reasons why central bankers will focus on sustaining the U.S. rebound.
Industry reports signal residential real estate is slowing. Housing starts last month dropped by the most since March 2009, and building permits, a sign of future construction, fell to a one-year low, data from the Commerce Department showed. The National Association of Home Builders/Wells Fargo confidence index for June fell by the most since November 2008.
Applications Drop
The number of mortgage applications filed to purchase houses dropped this month to the lowest level since 1997, according to data from the Mortgage Bankers Association.
The Standard & Poor’s Supercomposite Homebuilder Index, which includes Toll Brothers Inc. and Lennar Corp., dropped 27 percent through yesterday since reaching a 19-month high on May 3. The broader S&P 500 Index was down 8.6 percent from April 23’s 19-month peak.
Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, said orders fell 17 percent in the quarter ended April 30 from a year earlier, and contract signings slowed in May, indicating the tax credit helped pull some sales forward.
“The expiration of the federal homebuyer tax credit, the lack of job growth and a potential increase in foreclosures all pose risks to a housing industry recovery,” Ara K. Hovnanian, chief executive officer, said in a June 2 statement.
Tax Credit
Senator Harry Reid this month proposed extending the tax credit’s closing deadline from June 30 to Sept. 30 amid concern that a rush of buyers created too big a backlog for builders to complete projects in time. Senate Democrats on June 17 failed to get the 60 votes needed to move forward with the legislation that includes the proposal.
The window of opportunity for the tax credit has already passed for purchases of new houses, which are tabulated at contract signings and are considered a timelier barometer of the market. A Commerce Department report tomorrow will show new home sales plunged 21 percent to a 400,000 annual pace last month, according to the median forecast of economists surveyed.
Existing homes account for about 90 percent of the market.
Builders are being hurt by competition from foreclosed properties that are hurting property values. Foreclosures jumped to a record for the second consecutive month in May as lenders stepped up property seizures, according to RealtyTrac Inc., an Irvine, California-based data seller.
Cheaper borrowing costs are helping mitigate the damage. The average rate on a fixed 30-year mortgage was 4.75 percent last week, just shy of the record-low 4.71 percent reached in early December, according to data from Freddie Mac, the mortgage-finance company being supported by the U.S. government.
