Everyone expected home sales to fall once the federal homebuyer tax credit ran out at the end of April, but nobody foresaw a plunge as drastic as May’s sales – a 30% fall of signed sales contracts. According to the National Association of Realtors (NAR), the pending home sales index has been increasing steadily but topped out at 110.9 in April 2010. The index dropped to 77.6 this month, its lowest level since the initiation of the index in 2001.

first tuesday take: The federal homebuyer tax credit has been borrowing from one hand to give to another, and the economy has not had near enough job creation stimulus to deliver buyers to pick up where the subsidy leaves off. Tax credits function as a bridge to span the gap between the sudden recessionary downturn in sales and the recovery which brings with it an upturn in sales, but the subsidy has become a bridge to nowhere.

Worse yet, those who would have purchased a home during the next few months instead purchased earlier when they got $8,000 back in a tax reduction. Even now that the tax credit has been extended to September 30, 2010, for homebuyers already under contract, California is simply postponing the inevitable moment when it will have to reap what has been sown: several months of gut-wrenchingly low home sales after the credit ultimately expires. [For more information on the Federal homebuyer tax credit extension, see the July 2010 first tuesday Legislative Watch.]

Home sales will only increase when jobs increase. How many of the newly employed are going to want to purchase a new home so soon after spending months barely scraping by? Everyone is saving more while building up cash reserves in the process. While more savings are not what the economy presently needs, savings will provide the required down payments for the conventional loans homebuyers will need to purchase homes in the future.

Further, optimism among brokers and agents is crucial for the real estate market’s recovery. Realistically, however, a full recovery of property sales will take years. The good news: those financially able can take advantage of lower home prices and extremely favorable mortgage interest rates — the two most important deciding factors for purchasing a home.

Re: “Pending home sales ‘fell off a cliff’” from CNNMoney.com

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