US new home sales

In May 2010, US new home sales plunged by a dramatic 32.7%m/m to 300 000. The market was expecting a decline to 410 000. This is the lowest level ever recorded for US new home sales; the data series starts in 1963.

At the moment the US housing data is being significantly distorted by the ending of the US tax incentive to buy houses. As part of the US Government’s plan to stimulate the US housing market and address the economic challenges facing the country, the US Congress passed legislation more than a year-ago that provided various tax incentives to purchase a home. These incentive were initially scheduled to expire at the end of November 2009. However, on 5 November 2009 they were extended until 30 April 2010. The tax incentive for a first time home buyer was $8 000, while for someone who was a current home owner purchasing a new or existing home the incentive was up to $6 500.

It is certainly intriguing to see how adaptive and responsive the US tax legislation is in trying to deal with specific economic problems (incentives to purchase both houses and cars). It provides a useful policy alternative/addition to monetary policy; however the long-term merits of these types of incentives are debatable and clearly the fall-off in activity, once the incentive is discontinued, can be scary. 

Although the ending of the housing tax incentive in April certainly had a negative impact on housing, the underlying fundamentals for the housing market remain poor (see previous reports).

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