June 23, 2010
U.S. New Home Sales Drop 33% in May
By DAVID STREITFELD
The new housing market has never been this bad, at least not since the government started tracking such things in 1963.
Outdoing even the pessimists’ expectations, sales of new homes declined by a record amount in May to a new low. The dismal data, released by the Census Bureau on Wednesday, followed a disappointing report on sales of existing homes earlier in the week and added to growing concerns about the strength of the economic recovery.
Unemployment remains stubbornly high as private sector employers do not add jobs and retail sales are weak. And if no one seems to want to buy a house, many other people apparently are voluntarily ditching the ones they already have.
Fannie Mae, the big mortgage finance company that is a ward of the government, said Wednesday that homeowners who intentionally defaulted because they owed much more than the house was worth would be ineligible for a new Fannie Mae-backed loan for seven years.
“Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting,” Terence Edwards, Fannie Mae’s executive vice president for credit portfolio management, said in a statement.
Fannie Mae and its sister company Freddie Mac own or guarantee about 30 million mortgages. The new measures could help limit demand for houses for much of the next decade.
Fannie Mae said it would take legal action to recoup outstanding mortgage debt from borrowers who walk away. According to one study, 588,000 borrowers strategically defaulted in 2008.
Other economic news on Wednesday was downbeat.
Policy makers at the Federal Reserve, meeting in Washington, said that “financial conditions have become less supportive of economic growth.” As expected, the Federal Open Market Committee voted to keep short-term interest rates near zero.
Even as mortgage rates fell again last week, flirting with their modern-day lows, the Mortgage Bankers Association said that applications for loans to purchase homes fell. It was the fifth drop in six weeks for the purchase index, which is 36.8 percent below its level in June 2009.
“We can’t get the phones to ring,” said Michael E. Menatian, president of the Sanborn Mortgage Corporation in West Hartford, Conn. “Until there is economic growth — i.e., more jobs, wage appreciation, overtime and bonuses — we will have a housing problem.”
Builders sold new homes in May at an annual rate of 300,000, the Census Bureau said. That was 32.7 percent below the 446,000 rate in April, when buyers could still qualify for a tax credit, and is about a third the level in a normal economy.
Analysts had been expecting a drop to about 400,000. “We would be lying if we said the size of the drop was not shocking,” Dan Greenhaus, chief economic strategist for Miller Tabak, said in a research note.
Sales are now even lower than they were during the recession of the early 1980s, when interest rates approached 20 percent. The previous record low was September 1981.
“I think that builders should bite the bullet and stop building houses,” said Howard Glaser, a housing consultant. “They keep dumping new inventory into the market when what the market really needs is a moratorium.”
The builders maintain that they build only when they have orders from customers, and that their buyers are not interested in older stock. But the result is the same: too many houses, new and old, are competing for too few buyers.
The situation will likely get worse over the summer. In a normal market, the supply of homes available is less than six months. Currently, there are more than eight months’ worth of both new and existing homes.
With more foreclosures headed to the market, those numbers will likely go up.
Government data released Wednesday showed that newly initiated foreclosures increased 18.6 percent during the first quarter, to 371,000. Foreclosures in process increased 8.5 percent, to 1.17 million.
Under the system announced Wednesday by Fannie Mae, owners who walk away from their mortgages will be penalized even more than those who filed for multiple bankruptcy protection. Multiple filers are eligible for a new Fannie-backed mortgage after five years.
A Fannie spokeswoman said executives were not being made available to comment. The release did not address the question of how Fannie intended to distinguish between those who walk away and those who really could not avoid foreclosure.
Analysts and economists are growing more discouraged about the housing market; a majority said in one new survey that they expected prices to decline again this year. The size of the drop will be dictated by whether the market’s current queasiness is a temporary reaction to the end of the $8,000 tax credit or a more permanent malaise.
Buyers who signed contracts before April 30 qualified for the credit. These purchases will turn up in sales reports as they are completed.
While the credit clearly stimulated sales, the effect was milder than anticipated. The National Association of Realtors said this week that existing houses sold in May at an annual rate of 5.66 million, down slightly from April.
At a mortgage conference last month, David H. Stevens, Federal Housing Administration commissioner, said housing was “a market purely on life support, sustained by the federal government. Having F.H.A. do this much volume is a sign of a very sick system.”
In a recent interview, Mr. Stevens said his point was misconstrued. “The system is showing signs of stabilizing,” he said. “We’re vastly improved over where we were a year ago.”
To underline that notion, the Obama administration released this week its first monthly “housing scorecard.” It presents an optimistic picture of a housing market saved from the abyss by extensive government intervention.
Some of its good news, however, was distinctly relative. “Home equity up more than $1 trillion since first quarter 2009,” said one headline in the report. But, as the chart clearly indicated, in the three years before that, equity had fallen $6 trillion.
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