NCPA - National Center for Policy Analysis

Loss of a Credit Collapses the Market

September 8, 2010

There was always some concern that the Obama administration's attempts to prop up the housing market with a generous housing-tax credit could end badly.  Opponents of the policy -- worth up to $8,000 for first-time buyers -- argued that it would merely move sales around, from after the deadline to before, and could produce a slump when the deadline passed in April.

With the support of the credit gone, a period of housing market weakness was inevitable, but the actual decline has been distressingly bad, says The Economist.

  • On August 24th the National Association of Realtors reported that sales of existing houses for the month of July -- the first in which most sales were started after the deadline -- fell 27 percent from the previous month.
  • Single family houses sold at the slowest rate since 1995.

Those grim figures may not be a one-month fluke.  

  • New home sales are counted when contracts are signed, which means that July was the third month of data after the credit had expired.
  • It was also the worst on record (the previous low came in 1981).
  • Sales of new houses were down 32 percent year-on-year and down 80 percent from July 2005.

These rock-bottom sales figures indicate that housing markets in some cities have all but ground to a halt -- despite extraordinarily low mortgage interest rates.  At current low sales rates, it may take a decade to clear the backlog of houses owned by the banks, says The Economist.

 Source: "Loss of a credit collapses the market," The Economist, August 26, 2010.

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