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As Tax Credit Expires, New Home Sales Sink

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By Alejandro Lazo and E. Scott Reckard

RISMEDIA, June 25, 2010—(MCT)—Sales of newly built U.S. homes collapsed in May 2010, the government said recently, falling to a record low and stirring concerns among some economists that the housing market would stumble again now that a popular federal tax credit for buyers has expired.

The Commerce Department said new homes sold at a seasonally adjusted annual rate of 300,000 units in May, a 32.7% drop from the revised April estimate and 18.3% below the May 2009 figure. It was the lowest sales pace and the biggest decline since the government began tracking figures in 1963. Sales fell across all regions.

While many economists are expecting sales of both new and resale homes to falter in coming months as the effects of the federal tax credit begin to wane, the May drop was significantly larger than most had anticipated.

“No two ways about it, these figures were just awful, when you look at the magnitude of the decline,” said Michael D. Larson, a housing and interest rate analyst for Weiss Research. “Obviously we were all expecting some kind of hangover impact, but this is like what you would have on New Year’s Day.”

The pessimistic read on new-home sales came as a survey released by the Mortgage Bankers Association said applications for home purchases and refinancings fell again last week, marking the sixth decline in the last seven weeks. Taken together, the reports indicate the housing market is weakening despite the availability of the lowest fixed mortgage rates in more than a year.

“The big thing is this is happening while mortgage rates have fallen to historical lows,” Irvine, Calif., economist John Burns said. “If there was ever a time to buy a home, you know now is the time.”

While new home sales make up a much smaller share of the housing market than do sales of previously owned properties, analysts watch them closely to get a read on consumer sentiment and job creation, particularly in the construction industry.

The new-home sales figures also give an indication as to where the broader market might be headed in coming months as new-home sales are recorded when a buyer signs a purchase contract—as opposed to sales of previously owned homes, which are measured when deals close.

The federal tax credit required buyers to enter into a home purchase contract by April 30 and close their deals by June 30. The credit offered as much as $8,000 to first-time buyers and $6,500 for current homeowners.

“Today’s numbers certainly reinforce the idea that housing is weak outside of government support,” said Dan Greenhaus, chief economic strategist for Miller Tabak & Co. in New York. “The question always has been and remains: How quickly will we appreciate; how quickly are sales going to grow without government support? And the answer is: They are likely to be somewhat muted.”

Sales of previously owned homes fell 2.2% in May when compared with April, a separate group reported.

The median sales price of new houses sold last month was $200,900, a 1% increase from the previous month but a nearly 10% decline from the year-earlier median. The Commerce Department estimated that 213,000 new houses were for sale at the end of May, representing a supply of 8 1/2 months at the current pace.

Not all the news was bad. For the first time in two years, fewer homeowners are missing mortgage payments, Treasury Department regulators reported.

Three years have passed since the mortgage debacle made most subprime and nontraditional loans unavailable, and most loans since have been “plain vanilla” fixed-rate mortgages to prime-credit borrowers. The better-performing newer loans stand in contrast to the dicey old ones that finally are being flushed away for good.

The regulators’ first-quarter report on mortgages serviced by large national banks and thrifts said delinquency rates dropped in all categories, including the most default-prone subprime and alt-A loans. (Alt-A borrowers had decent credit scores but added risk factors; an alt-A borrower might have paid interest only at a fixed rate for the first five years with limited documentation of income and assets).

According to the Comptroller of the Currency and the Office of Thrift Supervision, the percentage of mortgages that were current and performing increased for the first time since the agencies began publishing the report in June 2008. Delinquencies fell in all categories, from a single missed payment to 90 or more days of delinquency.

The numbers increased, however, in all foreclosure categories. Compared with the previous quarter, newly initiated foreclosures increased 19% to 370,536; foreclosures in process increased 9% to 1,170,874; and completed foreclosures increased 19% to 153,654.

The regulators attributed the increase to servicers having exhausted efforts to assist holders of troubled loans. Under the government and private loan-modification plans, lenders proceed with seizing and selling homes if foreclosure is the least costly option for banks or loan investors after all modification options are applied.

The developments come as mortgage rates for highly qualified borrowers have dropped to the lowest level since 1950 and 1951. Borrowers with solid credit, 20% down payments and the provable ability to repay were able to find loans at interest rates of 4.25% for a 30-year fixed mortgage and 3.75% for 15-year loans, said John K. Holmgren, a spokesman for the California Association of Mortgage Professionals. To obtain those rates, borrowers would be required to pay 1% of the loan balance in upfront fees to lenders, Holmgren said.

The rates are available for loans of up to $417,000, the standard limit for mortgages that Fannie Mae and Freddie Mac will buy or guarantee. In higher-cost housing markets, where Fannie and Freddie buy larger loans, borrowers would pay a quarter of a point more in interest to obtain mortgages for up to $729,750, Holmgren said.

The U.S. Treasury gave final approval to a previously announced plan to provide $1.5 billion in federal funds to support anti-foreclosure programs in the five states hit hardest by the housing collapse, including $700 million in California to assist moderate-income families and military personnel.

Steven Spears, executive director of the California Housing Finance Agency, said plummeting housing prices and high unemployment “have created a homeownership crisis” in the state.

The state plan includes three mortgage assistance programs and help in finding rental housing for borrowers who cannot afford to stay in their homes after exhausting all other options.

(c) 2010, Los Angeles Times.

Distributed by McClatchy-Tribune Information Services.

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