Pending Sales of Existing U.S. Homes Decreased 30% in May

The number of contracts to purchase previously owned houses plunged in May by more than twice as much as forecast after a homebuyer tax credit expired.

The index of pending home resales dropped 30 percent from the prior month, figures from the National Association of Realtors showed today in Washington. The drop was the biggest in records dating to 2001 and compared with a 14 percent decrease forecast in a Bloomberg News survey of economists.

The decline shows that the industry at the center of the financial crisis remains vulnerable in the absence of government support. A stabilization in housing will depend on gains in incomes and employment that may stem foreclosures and give Americans the confidence to start buying again.

“Demand will be pretty depressed in the next few months,” Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, said before the report. “We’re still going to have a big overhang of foreclosures. There’s potential for prices to slow down a lot more.”

Stocks fell following the report and other data today showing that manufacturing expanded less than forecast and claims for jobless benefits unexpectedly increased. The Standard & Poor’s 500 index dropped 1 percent to 1,020.86 at 10:27 a.m. in New York.

The Institute for Supply Management’s manufacturing gauge fell to 56.2 last month from 59.7 in May. A reading greater than 50 points to expansion, and the median forecast of economists surveyed by Bloomberg News was 59. Initial jobless claims increased by 13,000 to 472,000 in the week ended June 26, Labor Department figures showed.

April Gain

Forecasts for the decline in pending home sales ranged from 4 percent to 25 percent, according to a Bloomberg News survey of 36 economists. Sales rose 6 percent in April.

All four regions saw decreases in May, today’s report showed, led by a 33 percent plunge in the South. Sales also fell 32 percent in both the Midwest and Northeast and 21 percent in the West.

Compared with May 2009, nationwide pending sales were down 16 percent.

The tax credit, worth as much as $8,000, helped fuel a rebound in demand last year and was extended and expanded in November. The credit required buyers to sign contracts by the end of April and close by June 30. The House of Representatives voted this week to push back the deadline for closing to Sept. 30.

Leading Indicator

Pending home resales are considered a leading indicator because they track contract signings. Closings typically occur a month or two later, and are tallied in the Realtors’ existing- home sales report.

Sales of existing homes, which account for about 90 percent of the housing market, fell 2.2 percent in May from the prior month, the Realtors’ group said last week. New-house purchases, which make up the rest of the market and are tabulated when a contract is signed, plunged 33 percent to the lowest level on record in May, according to the Commerce Department.

KB Home, Lennar Corp. and Toll Brothers Inc. are among builders facing sales declines after the end of the tax credit. Los Angeles-based KB Home, which targets first-time buyers, reported a wider-than-estimated loss for the quarter ended May 31 as new orders dropped 23 percent and the average price for its houses fell from a year ago.

Stepped Out

“Homebuyers who missed the deadline seemed to step out of the market completely,” KB Home Chief Executive Officer Jeffrey Mezger said in a June 25 conference call with analysts. It’s too early in the third quarter to forecast demand, he said.

“It’s a matter of when, not if, things are going to improve,” Mezger said.

Demand will hinge on the pace of improvement in the labor market. The economy lost 125,000 jobs in June, according to the median forecast in a Bloomberg survey before tomorrow’s Labor Department report, reflecting a drop in federal census workers. Private payrolls rose by 110,000, economists estimated.

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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