Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.
Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.
Stocks fell and Treasuries rose as the report added to signs of weakness in the economy, including a decline in retail sales and a slowdown in private job growth. A lack of inflation and concern over unemployment and housing were among reasons Federal Reserve policy makers renewed a pledge today to keep interest rates near zero for an “extended period.”
“May was a bad month for the economy,” J. Alfred Broaddus, former Richmond Fed president, said in an interview on Bloomberg Television’s “In Business With Margaret Brennan.” “You have these soft patches in the early stages of recovery.”
At their meeting, Fed policy makers left the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008. Central bankers said limited inflation was “likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Housing starts, they said in their statement, “remain at a depressed level.”
The yield on the 10-year Treasury note fell to 3.11 percent at 4:23 p.m. in New York from 3.17 percent late yesterday. The Standard & Poor’s 500 Index fell 0.3 percent to close at 1,092.04.
Sales were projected to drop 19 percent to a 410,000 annual pace, according to the median estimate of 76 economists surveyed. Forecasts ranged from 300,000 to 530,000. The government revised April’s purchase rate down to 446,000 from a previously reported 504,000.
The median price decreased 9.6 percent from the same month last year, to $200,900, the lowest since December 2003, today’s report showed.
Purchases dropped in all four U.S. regions last month, led by a record 53 percent decrease in the West.
The supply of homes at the current sales rate jumped to 8.5 months’ worth from 5.8 months in April. There were 213,000 new houses on the market at the end of May, the fewest since 1970.
The reduction in inventory puts builders in a better position to deal with the slump in demand than when housing peaked in 2005, said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. There were a record 572,000 new houses for sale in July 2006, one year after sales reached the highest point.
“We see no chance of a quick, sustained recovery, though we are hopeful there is little further downside,” Shepherdson, who correctly forecast the drop in sales, said in a note to clients. “We expect the very favorable affordability picture to start pulling people back into the market, but the next few months are likely to be very grim.”
The data come on the heels of a report from the Labor Department this month that showed companies hired 41,000 workers in May, fewer than forecast and the smallest gain in four months. Figures from the Commerce Department showed purchases at retailers dropped in May for the first time in eight months.
Effect on GDP
Housing’s role has shrunk so much that a renewed slump will do less damage to the world’s largest economy, said Jay Feldman, an economist at Credit Suisse in New York. Residential construction accounts for a record-low 2.4 percent of gross domestic product, down from 6.3 percent when the boom peaked in 2005, he said.
Housing’s “capacity to do the portfolio of GDP activities marginal harm going forward is greatly diminished,” Feldman said in a note to clients.
Other data confirm the market is stumbling. Sales of existing homes, housing starts, building permits, builder confidence and mortgage applications have all declined.
The S&P Supercomposite Homebuilder Index, which includes Toll Brothers Inc. and Lennar Corp., has dropped 28 percent through yesterday since reaching a 19-month high on May 3. The broader S&P 500 Index is down 10 percent from April 23’s 19-month peak.
Builders are also concerned that the Gulf oil spill and European debt crisis are hurting buyer confidence. Toll, the largest U.S. luxury homebuilder, said deposits have been running 20 percent behind the year-earlier period the past three weeks.
“Concerns about the financial crisis in Europe and escalating regional political tensions, coupled with worries about the oil spill in the Gulf of Mexico and its effects on the economy and the environment have negatively impacted the outlook of American consumers,” Joel H. Rassman, chief financial officer at Horsham, Pennsylvania-based Toll, said in a June 16 statement.
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.