Sales of new homes collapsed in May, sinking 33% to the lowest level on record, as potential buyers stopped shopping for homes once they could no longer receive a government tax credit. The bleak report from the Commerce Department is the first sign of how the end of short-term federal tax credits could weigh on the nation’s housing market. The credits expired April 30. That’s when a new homebuyer would have had to sign a contract to qualify. “We fear that the appetite to buy a home has disappeared alongside the tax credit,” says Paul Dales, U.S. economist with Capital Economics. “After all, unemployment remains high, job security is low and credit conditions are tight.”
New home sales in May fell from April to a seasonally adjusted annual sales pace of 300,000, the government says. That was the slowest sales pace on records dating back to 1963. And it’s the largest monthly drop on record. Sales have now sunk 78% from their peak in July 2005. Analysts were startled by the depth of the sales drop. “We all knew there would be a housing hangover from the expiration of the tax credit,” says Mike Larson, real estate and interest rate analyst at Weiss Research. “But this decline takes your breath away.” Sales in the South dropped 25%.