A report Wednesday that new home sales plummeted to a record low after the federal housing tax credit expired added to worries that the broader economy could relapse after a spurt of growth in the last year.
It also lent weight to warnings from the White House and the Federal Reserve that now is not the time to withdraw all federal stimulus and impose major spending cuts. The Fed signaled its renewed concern about the economy after a two-day meeting during which it decided to keep interest rates close to zero Wednesday.
The plunge by nearly a third in new home sales to an all-time low annual rate of 300,000 reported by the Commerce Department was a “shocker” even though a decline had been expected after the expiration of the first-time home-buyer’s tax credit on April 30, said Harm Bandholz, chief U.S. economist at Unicredit Markets.
“Sales fell almost twice as much as expected,” he said, and what makes it “even more concerning is by far the biggest public support for the housing market is still in place.” The government continues to insure or guarantee nearly every mortgage in the U.S. through the Federal Housing Administration, Fannie Mae and Freddie Mac.
Recent days have brought a rash of evidence of renewed weakness in housing after a year of revival, including a nearly 10 percent drop in new home prices from last year and a 2.2 percent drop in May existing home sales reported by the National Association of Realtors on Tuesday.
Mr. Bandholz said the renewed housing downturn, along with more sluggish growth in jobs and fallout from the European debt crisis, is forcing the Fed to become more “cautious” and put on hold earlier plans to withdraw further monetary stimulus from the economy.
The Fed noted that housing “remains at a depressed level” and that “bank lending has continued to contract” while “financial conditions have become less supportive of economic growth” as a result of the European debt crisis.
The housing reports showed some evidence of a renewed credit crunch among riskier borrowers, as many contracts for home sales were reported to have been delayed or fallen through last month as a result of banks not approving loans sought by aspiring first-time home buyers.
The increased reluctance of banks to approve loans appears to be counteracting the support for housing provided by a dramatic drop in mortgage rates to near-record lows around 4.75 percent, which was also spawned by the crisis, according to a report Wednesday from the Mortgage Bankers Association.
“Housing could be in for a double-dip downturn,” said Sung Won Sohn, economics professor at California State University Channel Islands. The abysmal performance of home sales since the tax credit expired shows “how dependent the fledging housing recovery is on government help” and is forcing the Fed to be more cautious about withdrawing support, he said.
Most of the subsidies for housing were directed by Congress. The White House has been warning Congress not to back off stimulus efforts until the economy shows signs of a more convincing recovery.
But the administration’s pleas for more stimulus funding have been increasingly falling on deaf ears in Congress, where concern about spiraling U.S. budget deficits is on the rise.
“We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth,” said Treasury Secretary Timothy F. Geithner and White House National Economic Council Director Lawrence Summers in an opinion piece Wednesday. “Without growth now, deficits will rise further and undermine future growth.”
The recent housing news has given “lots of ammo” to economists who are predicting a double-dip recession, said Bernard Baumohl, chief global economist at the Economic Outlook Group, but he expects the economy to continue to recover even without government support.
“There is admittedly one essential part of the recovery that has not yet come on line - housing,” he said. “It remains the weakest link in the economic chain, yet its comeback is vital to clinch the deal that this recovery is irreversible.”