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June 23, 2010

“Cash for Clunkers”, revisited: New home sales plunge to lowest level on record

The Associated Press reports that another major chunk of the façade known as the “economic recovery” has crumbled:

Sales of new homes collapsed in May, sinking 33 percent to the lowest level on record as potential buyers stopped shopping for homes once they could no longer receive government tax credits.

The bleak report from the Commerce Department is the first sign of how the expiration of federal tax credits could affect the nation's housing market.

The credits expired April 30. That's when a new-home buyer would have had to sign a contract to qualify.

"We fear that the appetite to buy a home has disappeared alongside the tax credit," Paul Dales, U.S. economist with Capital Economics," wrote in a note. "After all, unemployment remains high, job security is low and credit conditions are tight."

Sound familiar?  Last summer, the “Cash for Clunkers” program created an artificially high demand for automobiles, almost certainly spurring purchases by people who otherwise wouldn’t have (or shouldn’t have) done so.  Once the C4C program ended, auto sales dropped through the floor.

Here we go again.  The federal tax credits for new home purchases is gone, and sales have dropped to a level never before seen in the 47 years that the government has been tracking this statistic. 

Just like we saw with C4C, it is likely that many who bought a home in recent months should not have done so.  How many of them will be in foreclosure in just a few short years?

Remember these examples each time you are told that we’re in the midst of an economic recovery.

Given the fresh storm clouds gathering on the horizon, now may not be the best time to buy a home, with or without a tax credit incentive.

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