The federal homebuyer tax credit expired at the end of April for home purchase contracts which must be closed/settled by the end of June.  Now there is mounting concern about how much demand had been forwarded into April from the coming summer months.  According to the Mortgage Bankers Association, purchase application activity has declined for five consecutive weeks since the tax credit expired.  Their seasonally-adjusted purchase index is at its lowest level since December 1996, and this despite near-record low mortgage rates.  If that is any indication of where housing demand currently stands, the housing market could be in for a rough summer. 

Another rise in the National Association of Realtors’ Pending Home Sales Index for April confirmed that demand for housing remained high in the days leading up the expiration of the federal homebuyer tax credit.  The index in April reached its highest levels since October 2009 when the original federal homebuyer tax credit was set to expire.  While a fall in Purchase Mortgage Applications suggests some drop off in May, National Association of Realtors Chief Economist believes that the housing market has stabilized, stating it “appears to be in a good position to return to sustainable levels even without government stimulus, provided the economy continues to add jobs.”

Homebuyers flooded the market in the last two months leading up to the expiration of the homebuyer tax credit.  Both new and existing home sales increased again in April, driving new home sales to its fastest annual pace since May 2008 and existing home sales to its quickest annual rate since November 2009.  The question remains what will happen now that the tax credit has expired?

Data released this week on the housing front has brought about some reason for concern domestically, while international turmoil relating to sovereign debt has weighed heavily on the equity markets.  Purchase mortgage applications plunged for the second straight week to its lowest levels since May 1997 which suggests that sales activity will likely dip significantly following the expiration of the federal homebuyer tax credit.  Demand was high for the first few months of the year due to lower rates and the tax credit but now there may be a bit of a lull.  Builders are already bracing for a slowdown in activity.  Even though housing starts continued to rise in April, building permits dropped considerably.  The drop in building permits, which are an indicator of future activity, suggests that housing activity is likely to slow in coming months. 

Equities are poised to finish higher than a week ago despite a Friday sell-off because of exuberant activity earlier in the week.  The market soared on Monday after the European Union announced a $1 trillion emergency rescue plan to address concerns over debt defaults in Greece and potentially other deficit-troubled EU nations like Portugal, Ireland and Spain.  The bail-out package is similar to the United State’s TARP (Troubled Asset Relief Program) in 2008 which will provide emergency relief funds and loan guarantees to these nations that are swamped with debt and unable to shore up credit.