Both new and used home sales “unexpectedly” fell below economists’ expectations in January declining by record amounts.  This follows on the heels of the previous record-setting decline in December.

Below are excerpts from two Bloomberg articles this past week which reported the sales figures:


Feb. 24 (Bloomberg) -- Sales of new homes in the U.S. unexpectedly fell in January to the lowest level on record, a sign that an extension of a government tax credit may not be enough to rekindle demand.

Purchases declined 11 percent to an annual pace of 309,000, below the lowest forecast in a Bloomberg News survey of economists, figures from the Commerce Department showed today in Washington. The median sales price dropped 2.4 percent from January 2009 and the supply of unsold homes increased.

Feb. 26 (Bloomberg) -- Sales of previously owned U.S. homes unexpectedly dropped 7.2 percent in January to a seven-month low, indicating a lack of job growth is undermining government incentives to bolster the housing market.

The decline to an annual pace of 5.05 million, reported today by the National Association of Realtors in Washington, was the second-largest on record after December’s 16.2 percent plunge.

A federal tax credit for home buyers is showing few signs of providing the lift that it did late last year, when purchases surged in November to the highest level since 2007.


The Blind Leading the Blind

In February 2009 Congress passed an $8,000 tax credit for first-time homebuyers which was set to expire in November 2009.  This extraordinary act of housing market intervention made it inevitable that home sales would collapse following the program’s stated termination date.

Policy makers, oblivious to reality, extended the tax subsidy on the eve of its expiration in hope of maintaining artificially elevated sales volumes which resulted from the $8,000 benefit.

Congress is driven by political expediency.  Institutional economists have no such excuse.  Four and a half years into the Housing Collapse economists continue to demonstrate an inability to anticipate dynamic but inevitable events. 

This is apparently the curse of academic prognosticators who rely on backward looking econometric tools to formulate future expectations.  Anytime the trend-line changes direction “economists’ expectations” will invariably be wrong.  This phenomenon is fascinating because the incentives which drive the change of direction are well understood and largely common sense.

The Impact of Subsidizing Home Purchases for a Finite Period of Time

Over the last several years potential home-buyers postponed transactions due to falling prices, economic uncertainty and a lack of access to credit.  The $8,000 tax benefit had the effect of catalyzing pent up demand for houses.  It also established a financial incentive which moved future purchases forward into 2009.  Why buy a home in January 2010 when an $8,000 tax benefit is available to do so two months earlier? 

It matters not that the credit was extended by Congress at the last moment.  For 10 months potential homebuyers behaved under the assumption that it would expire in November.  There is no longer pent-up demand amongst first-time homebuyers and there are now fewer potential owners in the market.  Congress’ extension of the policy had no chance of maintaining the sales volume distortion as the program’s benefit had largely been exhausted.  Certainly some number of transactions which would have taken place in 2011 will be pulled forward into 2010, but to no productive end.

The Government’s strategy in dealing with the Housing Collapse and broader Depression has been consistent.  Policy makers continue to interfere in the private sector in ways which are unsustainable but create short-lived economic distortions which establish the fleeting impression of stability or recovery.  In pursuing this strategy our misguided politicians only succeed in postponing a resolution to the downturn and worsening our economic predicament.

Dismal Reality

The only thing surprising about January’s sales figures is that economists didn’t expect a collapse following the planned termination date of a program which paid people to buy houses.  Did none of these economists pay attention to Cash-For-Clunkers?  

TheAffordableMortgageDepression.com continues to observe that distortive Government interference in the housing market is unsustainable and will fail.  With respect to the “Cash-For-Condos” scheme, TheAMD.com has consistently projected a collapse in sales volumes and a resulting decline in prices.

7/29/2009 - The Most Interesting Housing Event Since Prices Began to Decline in 2006 

10/5/09 - A Practical Lesson in “Recoveries” Which Are Predicated Upon Subsidized Consumer Spending

11/23/09 - Housing Prices Continue to Plummet Despite Extraordinary Government Intervention

1/21/10 - Why Housing Prices Will Resume Collapse in 2010

1/25/10 - As Expected, Existing Home Sales Collapsed Following the Zenith of "Cash-For-Condos"

What Happens Next?

I pose the following question for anyone interested in the economics driving The Affordable Mortgage Depression.  What happens to prices when new home sales fall to the lowest level on record and existing home transactions register their second-largest decline ever?

If you are an institutional economist and require a hint: It does not bode well for housing prices or the Government’s failed attempt to prop them up.