Stephanie Armour
USA Today
A real estate sign at an Idaho development. By Troy Maben, AP file
The number of buyers who signed contracts to purchase homes tumbled 30% in May, as low mortgage rates do little to motivate home buyers.
The National Association of Realtors said Thursday its seasonally adjusted index of sales agreements for previously occupied homes fell to 77.6 from 110.9. May’s reading was the lowest dating back to 2001.
The index was down 15.9% from a year earlier.
The average rate on a 30-year, fixed mortgage was 4.89% in May, Freddie Mac said.
The pending-home sales reading provides an early measurement of sales activity because there is usually a one- to two-month lag between a sales contract and a completed deal.
On Wednesday, the Mortgage Bankers Association reported that mortgage applications for purchases fell again last week, the seventh time in the past eight weeks. The MBA’s purchase index remains at 13-year lows despite the lowest interest rates in decades.
The average rate on a 30-year, fixed mortgage was 4.69% last week and 5.42% a year ago, Freddie said last week. The rate fell to 4.58% this week, it said Thursday.
Federal tax credits helped to boost home sales this spring. First-time home buyers could get a credit of up to $8,000, while homeowners who bought and moved also could get up to $6,500.
Many buyers rushed to sign contracts before the credit expired April 30. That pulled demand from later this year. Wednesday, the Senate joined the House in passing a bill giving buyers until Sept. 30 to close deals.
It was widely expected that sales would flag once the tax credit expired. But such a large decline in sales is surprising.
“We are once again struck by the force of the drop,” wrote Dan Greenhaus, chief economic strategist at Miller Tabak. “There is simply no other way to spin the recent housing data as anything other than significantly worse than virtually anyone, including the housing bears — a group in which we find ourselves — envisioned.”
Beyond the expiration of the tax credit, home sales are hurting despite low rates because of:
•Tight credit standards. Freddie Mac and Fannie Mae, which buy mortgages from lenders and now provide much of the financing for the mortgage market, are stricter about the mortgages they’ll buy. Freddie Mac no longer accepts loans without documentation from borrowers. And the average score for new loans at Freddie Mac was 751 in the first quarter of 2010 compared with 710 in 2001.
That’s forced banks to tighten their standards so they can sell their mortgages to Fannie and Freddie, rather than keep them on their books, says David Dessner, sales director at GuardHill Financial, a residential mortgage company.
•Lost equity. About a quarter of all residences with mortgages are worth less than the unpaid mortgage — leaving many owners unable to move and buy another house.
“Credit is just really tight. We’re going to see some really bad numbers in July,” says economist Patrick Newport at IHS Global Insight. “I don’t think interest rates are nearly as important as they were before, because it’s hard to find financing and (homeowners) have to have equity in their house. There are so many underwater — they can’t move up.”
Mortgage rates may stay low. They closely follow yields on 10-year Treasury notes, which have fallen on the bond market’s view that the economy is weak and inflation isn’t in sight.
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