The consequence of the temporary home buyer tax credit showed its face with a 33% drop in new home sales in May, the first month when a contract to purchase a new home was not eligible for a tax credit.  The purpose of the tax credit was to provide momentum to home buying as buyers remained uncertain.  Moving demand to an earlier period hastens the recovery but it does have a consequence if the momentum cannot be sustained. So, the real question in the new home sales number is not so much the amount of change between the last month of qualification and the first month without the credit than it is about the next several months and the rest of 2010.

To answer that question, first look at the change over a couple of months.  The first quarter average was 362,000 home sales and the April-May average was 373,000 so there is still an upward trend when the two months straddling the credit deadline are averaged. 

Second, what will drive the decisions to buy over the next 6 months?  Mortgage rates are at near record lows and are very likely to remain low.  Home prices have stopped dropping in most markets and appear to be recovering if only slightly.  Employment has started to increase even if by relatively small amounts.  Young people postponed establishing their own household for the last several years so that there is some pent up demand waiting to buy or rent.  Finally, the rate of additions to mortgage distressed properties has fallen so that the pipeline to foreclosure will begin to diminish.  These are all good signs for economic recovery and for a housing recovery.

The inventory of unsold new homes remained at a 40 year low as builders continue careful planning for future sales.  Two notes of positive news.  First, the share of homes sold continued to shift toward the lower end of the price ranges, which supports other evidence that first time home buyers are the most active component of the market.  Second, the share of homes sold in May that have not yet started also increased, implying continued work for home builders.

The return to normal will be slow and bumpy as different regions and states join but the postponed demand and improving housing market conditions will be the next stimulus that pushes sales and construction forward.