Market Talk

There’s nothing surprising about the May new home sales report. We all knew a bad number was coming. Yet the report still managed to shock when it crossed the tape earlier today.

Without a government subsidy to prop up the housing market, new-home sales in May plunged 32.7% to a record low 300,000, worse than the 20.6% drop to 400,000 that economists had estimated. Sales dropped in all four regions, including a whopping 53% plunge in the West. The steep decline also comes after two months of big increases as buyers earlier rushed to qualify for the tax credit before its expiration.

“Bottom line, we knew there would be a large post tax credit drop in sales but the degree is obviously big,” says Miller Tabak’s Peter Boockvar. Beyond today’s data, he wonders what will happen in the near-term as markets adjust to life without the subsidy. “The distortion of steroid shots into the marketplace has only made long-term planning and thus efficiently allocated capital that much more difficult to coordinate.”

The government, of course, was hoping that the economy would’ve improved by the time the tax credit faded so that increasing employment and income would’ve helped stabilize the housing market, Barbara Kiviat points out at Time’s Curious Capitalist blog.

But “anyone who was surprised this morning that this hasn’t yet happened hasn’t been paying attention,” she says. Now, instead of a tax credit, all the market can rely on is the “fundamental force of affordability.”

Optimists can take solace in one caveat: “This data series is notoriously noisy,” Barry Ritholtz writes at The Big Picture. “You are much better off using a three-month moving average than read too much into any single month.”

May could very turn out to be an anomaly, meaning only time will tell how valid this report truly is.

But Calculated Risk blogger Bill McBride isn’t optimistic that a housing recovery will take form anytime soon. McBride, who was one of the early callers of the housing bust, takes a look at the relationship between existing home months-of-supply to house prices and notes that when months-of-supply is below six months, prices typically rise, and vice versa.

So it’s important to note the 8.3 months of existing home supply in May, as well as 8.5 months of new home supply, both remain well above average.

“We are much closer to the price bottom now than in 2008, and I don’t expect that severe of a price decline,” McBride says. “But I do expect house prices to fall in the 2nd half of 2010 and into 2011 — probably another 5% to 10% for the major house price indexes.”