The housing slide we’ve been waiting for

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We’ve known for a long time that the expiration of the federal home-buying tax credit would trip up the housing market. Many people who had been planning on buying a house down the road accelerated that decision in order to grab the credit. The byproduct of that acceleration was always going to be that post-credit there would be fewer people still in the market to buy. Economists surveyed by Dow Jones Newswires have been figuring on a month-over-month drop of nearly 21% in new-home sales in May because of the tax credit’s April 30 expiration. Well, today we got the May numbers, and the drop is there—and bigger than expected.

According to the Census Bureau, new-home sales in May dropped by nearly 33% from April, to a seasonally adjusted annual rate of 300,000. That’s the biggest drop since 1963, when the government started keeping track. That drop feels particularly jarring since it came on the heels of rising sales in April (up 15% to a revised yearly pace of 446,000) and March (up 12% to 389,000).

But, again, this is not anything we weren’t expecting. The hope was always that the economy would be in better shape by this point, that as the tax credit faded, rising employment and income would enter as a new source of housing-market stabilization. Anyone who was surprised this morning that this hasn’t yet happened hasn’t been paying attention. That’s especially true considering lackluster existing-home sales announced yesterday. (Naturally, the stock market took a dive anyway.)

All of that, though, is backward-looking. What should we expect moving forward? Ian Shepherdson, the chief U.S. economist at High Frequency Economics writes:

Given the massive drop in mortgage applications since the credit expired we see no chance of a quick sustained recovery, though we are hopeful there is little further downside. By the fall, we expect the very favorable affordability picture to start pulling people back into the market, but the next few months are likely to be very grim.

To the fall, then, and a market that relies not on a tax credit but on the fundamental force of affordability.