New-Home Sales in Surprise Decline

The Oct. 28 report by the government that the rate of new-home sales posted a surprising 3.6% drop in September from August is likely to give a boost to advocates of extending a federal first-time home-buyer tax credit that is due to expire at the end of November.

The Commerce Dept. reported that sales of new one-family houses in September were at the seasonally adjusted rate of 402,000, down 3.6% from a revised August rate of 417,000. The sales rate is 7.8% below the previous-year number. Economists surveyed by Thomson Reuters had expected a pace of 440,000.

It was the first sales drop since March.

The median sales price of $204,800 was off 9.1% from $225,200 the year before, but up 2.5% from August's level of $199,900.

Extending the Tax CreditPaul Dales, U.S. economist with Capital Economics in Toronto, said in a report that the sales numbers could be the first sign that the pending expiration of the $8,000 first-time home-buyer tax credit was affecting the market. "The new-homes sales data are collected at an earlier stage of the home-buying process than the existing sales data (contract signing rather than closing), so we would expect that data to pick up any fall-off in sales first," Dales wrote.

The credit, which is limited to buyers who have not owned a home for the past three years, is due to expire Nov. 30. But several bills to extend the credit have been introduced, including one co-sponsored by Senate Banking Committee Chairman Chris Dodd (D-Conn.) and Sen. Johnny Isakson (R-Ga.) that would extend the credit to June 30, 2010, and expand it to include buyers who previously owned homes.

About 1.4 million borrowers have claimed a total of about $10 billion in credits through the program, which was approved in February. A Treasury Dept. inspector general recently testified to a congressional committee that many of the claims for the credit have turned out to be fraudulent or filed by ineligible purchasers.

Critics of the plan say that many of the home sales in which the tax credit was claimed would have occurred anyway. The Calculated Risk blog recently estimated that of the 2 million sales in which the tax credit would be claimed, only 350,000 would be incremental buyers—costing taxpayers $43,000 a sale.

Associated Press contributed to this report.

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