Business | Thu Jun 24, 2010 3:00am BST

U.S. new home sales at record low as tax credit expires

WASHINGTON (Reuters) - Sales of new U.S. homes dropped a record 32.7 percent in May to the lowest level in at least four decades as the boost from a popular tax credit faded, adding to worries over a slowing economic recovery.

Single-family home sales tumbled to a 300,000 unit annual rate, the lowest level since the series started in 1963, the Commerce Department said on Wednesday.

The gloomy report was the latest to imply the economy's recovery from the worst downturn since the 1930s might be losing strength, but few analysts expect a double-dip recession.

"This tends to reduce expectations for second quarter growth. We are going to go through a period where home sales are extremely depressed before we see a recovery take hold, probably late this year," said Mark Vitner, senior economist at Wells Fargo Securities in Charlotte, North Carolina.

The Federal Reserve will weigh the report and other recent soft data as it wraps up a two-day meeting later on Wednesday. The grim housing news was seen as the latest reason for the Fed to extend its ultra low interest rate policy.

Not only did sales in May miss market expectations for a 410,000 unit-pace, figures for the prior two months were revised down sharply. That indicated the lift from the homebuyers' tax credit was not as large as previously thought.

Despite the downbeat report, the Dow Jones home construction index .DJUSHB was trading higher, although major U.S. stock indices were lower. U.S. Treasury debt prices rallied, while the dollar fell against the yen.

Data from retail sales to employment have pointed to a moderation in the pace of the economic recovery that started in the second half of 2009. Against the backdrop of a fragile economy and a sovereign debt crisis in Europe, analysts do not see the Fed raising interest rates until sometime in 2011

The U.S. central bank, which has held rates near zero since December 2008, was set to outline its views on the economy in a statement at around 2:15 p.m. (7:15 p.m. British time).

"We expect the wording of the Federal Reserve policy announcement this afternoon to reflect ... increased down-side risk," said Robert Dye, a senior economist at PNC.


The expiry of the tax incentive has also resulted in a decline in new home construction and a big drop in demand for home loans.

To qualify for the tax credit, prospective home owners had to sign contracts by April 30. Since then, applications for loans to buy homes have fallen sharply. Last week they dropped for the sixth time in seven weeks, staying near 13-year lows.

New home sales are measured at contract signing. A report on Tuesday showed sales of previously owned homes, which are recorded at contract closing, fell unexpectedly in May.

Last month's weak new home sales pace saw the supply of homes available for sale jumping a record 46.6 percent to 8.5 months' worth, the highest in nearly a year, from 5.8 months' worth in April. However, the number of new homes on the market dipped to 213,000 units, the lowest since November 1970.

The median sale price for a new home fell 1 percent in May from April to $200,900 (134,877 pounds). In the 12 months to May, prices fell 9.6 percent, the largest decline since July 2009.

Although mortgage rates are near record lows, a deluge of foreclosed properties is stifling recovery.

The number of newly initiated foreclosures rose 18.6 percent to 370,856 in the first quarter, a separate report from U.S. banking regulators showed. However, delinquencies on home mortgages fell for the first time in more than two years.

(Additional reporting by Corbett Daly; Editing by Andrew Hay)