Americans showed far less appetite to buy new homes last month after the government stopped offering a homebuyer tax credit. The news signaled a renewed housing slump that threatens the broader economy.
Sales of new homes fell in May to their lowest level on record, plunging 33 percent from the month before. The bleak data followed a report earlier this week that sales of existing homes dipped, too.
The Federal Reserve, mindful of the fragility of the housing market, struck a more cautious tone Wednesday in its read on the economy. It said only that the recovery is "proceeding." It had previously said the rebound was strengthening.
The Fed repeated its pledge to hold interest rates at record lows to fuel economic growth. That has helped keep mortgage rates down, but even ultra-low rates couldn't overcome the chilling effect on new-home sales caused by the end of the tax credits.
The government offered up to $8,000. To qualify, buyers had to sign a contract by April 30.
"We all knew there would be a housing hangover from the expiration of the tax credit," wrote Mike Larson, real estate and interest rate analyst at Weiss Research. "But this decline takes your breath away."
High unemployment and slow job growth are weighing on the housing market as well. Fed Chairman Ben Bernanke has expressed confidence that the nation won't fall back into a "double dip" recession. At the same time, the recovery remains vulnerable, and one of the chief threats is the real estate market.
New-home sales for May came in at a seasonally adjusted annual sales pace of 300,000, the Commerce Department said Wednesday. That was the slowest in the 47 years records have been kept. And it was the largest monthly drop on record. Sales have now sunk 78 percent from their peak five years ago.
The broader economy is feeling the impact. The drop in new-home sales means fewer jobs in the construction industry, which normally powers economic recoveries. This time, construction has remained lackluster.
Each new home built creates roughly three jobs for a year and generates an average of $90,000 in taxes, homebuilders say. The effect extends to other industries, from lumber yards to makers of kitchen faucets.
The discouraging report on housing "really speaks to the sustainability of the economy without stimulus" from the government, said Wells Fargo Securities economist Anika Khan. "We are still very much in the nascent stages of the recovery."
Buyers who signed sales contracts by the April 30 deadline have until June 30 to close on their purchases and qualify for the tax credit. Because the new-home sales report measures contracts to buy homes, it offers a glimpse of what the housing industry will endure throughout the summer.
Michael Sivage, CEO of Sivage Homes, which builds homes in Albuquerque, N.M., and San Antonio, Texas, said, "We had a really strong start for the year, but then when April 30th hit, it was almost like turning off the spigot."
Homebuyers' sentiment has shifted over the past year as prices have stabilized, said Rick Porter, president of Atlanta builder Richport Properties.
"They have determined that there's good value in housing right now," he said. But he added that potential buyers are still concerned about their finances and are being cautious about making a major decision.
"We don't have them on the sidelines waiting for prices to fall," Porter said. "They're on the sidelines waiting for the economy to stabilize."
Unlike new homes, sales of previously occupied homes are recorded not when a contract is signed but when a sale closes. That can sometimes take two months.
That's why there were expectations this week for strong sales of previously occupied homes through June. But the 2.2 percent drop in May from the previous month showed the entire industry is weakening.
New-home sales fell nationwide from April's levels. They dropped 53 percent from a month earlier in the West and 33 percent in the Northeast. Sales dropped 25 percent in the South, 24 percent in the Midwest.
Builders sharply scaled back construction after the housing market bust. The number of new homes up for sale in March fell to the lowest level in nearly 40 years. But the sluggish sales pace in May means it would still take eight and a half months to exhaust that supply. A healthy level is about six months.
The median sales price in May was $200,900. That was down 9.6 percent from a year earlier and down 1 percent from April.
New-home sales made up about 7 percent of the housing market last year. That's down from about 15 percent before the bust. Demand for new homes has slumped, partly because builders have been forced to compete with foreclosed properties that sell at steep discounts.
One bright spot emerged Wednesday from a survey of corporate executives. It found the number of CEOs planning to ramp up hiring has reached its highest point since mid-2007.
The Business Roundtable, an association of CEOs of big U.S. companies, said its survey shows 39 percent of chief executives expect to boost their payrolls in the second half of 2010. Only 17 percent say jobs will drop. About 43 percent expect no change in the size of their work force.