Home sales surge in October as buyers rush to take advantage of tax credit

Tax credit gives home sales best boost in decade

WASHINGTON — First-time buyers taking advantage of a special tax credit gave sales of existing homes in October their biggest surge in a decade, raising hopes for a turnaround in the housing market and pleasing Wall Street.

While rising foreclosures and disappearing jobs still threaten the comeback, there are now bidding wars for houses in some cities, and home sales are nearly 36 percent above their low point in January.

The National Association of Realtors said resales rose 10.1 percent to a seasonally adjusted annual rate of 6.1 million in October, from 5.5 million in September. It was the biggest monthly increase in a decade and far better than what economists expected, according to Thomson Reuters.

Analysts said the gains mainly reflected the tax credit of up to $8,000 for new homeowners, which was due to expire this month before Congress extended it until spring — and expanded it to more buyers.

The sales figures released Monday provided the juice for a rally on Wall Street. The Dow Jones industrial average, also lifted by a weak dollar, rose more than 130 points.

The extension of the homebuyer tax credit should help sustain the housing market next year, economists said. Yet the overall economy will probably benefit only slightly from higher home sales.

There are still too many factors weighing down the recovery. Foreclosures are rising. Job creation is slow. People remain reluctant to spend. And construction of new homes — as opposed to sales of existing ones — plunged in October.

The biggest contribution the housing industry makes to economic growth is from home building. Commissions and fees generated from home sales also help, but far less than construction.

“I wouldn’t want to bet the house on housing, really, in terms of the strength of the U.S. economy going forward,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.”

That’s partly because shoppers seem in no mood to spend. In fact, 93 percent say they’ll spend less or about the same as last year, according to an Associated Press-GfK poll. Half of all those polled say they’re suffering at least some debt-related stress.

Next year is likely to bring only slight improvement, given high unemployment and tight credit, according to the National Association for Business Economics. Consumer spending will rise a lackluster 2 percent next year, restraining the recovery, NABE forecasters said.

For now, the housing market is feeding on the homebuyer tax credit, along with falling home prices and low mortgage rates. Average rates on 30-year mortgages have hovered around 5 percent this fall.

At the current sales pace, there’s a modest seven-month supply of previously occupied homes on the market. Sales are still running 16 percent below their peak in 2005, but real estate agents say the pace has definitely picked up.

“People who are looking, they are serious,” said Harrison Tulloss, an agent with ZipRealty Inc. in the Raleigh-Durham area of North Carolina. “They’re not riding around with me if they need to go shopping or buy a turkey.”

Joey Wilson and her husband made unsuccessful offers on 20 Las Vegas homes starting in midsummer before they closed on a four-bedroom, $136,000 home this month.

“It’s insane,” said Wilson, who relocated from Kentucky. “I’ve never seen a market like this before.”

Reduced home prices and federal programs to lower mortgage rates have brought more buyers into the market. The median sales price was $173,100 in October, down 7 percent from a year earlier and 25 percent below the peak.

Many experts predict prices will hit a new low next spring, perhaps falling 5 to 10 percent further as more foreclosures spill into the market. The government has tried to counter that trend by offering the tax credit and keeping mortgage rates low.

Without the a deadline looming for the tax credit, home sales are likely to fall over the winter as buyers hibernate for a few months. Analysts say the new deadline — buyers have to sign a purchase agreement by April 30 — means sales will surge next spring, before dropping back again later in 2010.

What happens after that is anyone’s guess.

“When we do kick those crutches out from under the housing market, will it be able to stand on its own?” said Mark Fleming, chief economist with First American CoreLogic. “It’s really hard to tell.”

The government has also helped the housing market by acting to lower mortgage rates. The Federal Reserve, for example, has pumped $1.25 trillion into mortgage-backed securities to try to lower mortgage rates and loosen credit. That program is scheduled to end by March.

If rates go up without the government help, homes would be less affordable, which could dampen demand.

A disquieting report last week from the Mortgage Bankers Association said more fixed-rate home loans made to people with good credit were sinking into foreclosure as layoffs go on. A record-high 14 percent of homeowners with a mortgage were either behind on payments or in foreclosure at the end of September.

In areas where foreclosures have hit hard, housing remains depressed, despite low prices, low mortgage rates and the tax credit. Yet for homebuyers with cash and access to credit, falling prices and low mortgage rates have proved irresistible.

The Realtors’ report on October home sales reflects offers made before buyers knew the credit would be extended.

In Raleigh, N.C., first-time buyer Louise Brunson snapped up a three-bedroom town house for $235,000. She and her husband had planned to buy a year and a half ago but decided to wait until prices fell further. The tax credit was a big plus, too.

“We suspected that it might be extended,” said Brunson, a paralegal. “But we did want to go ahead and get it done to be on the safe side.”

Associated Press writers Alex Veiga, Adrian Sainz and David Twiddy contributed to this report.