Existing Home Sales Fall in May

Home resales fell to a 5.66 million unit rate in May, after being revised upward slightly to a 5.79 million unit pace in April, according to a report Tuesday from the National Association of Realtors. What does this mean for the housing market and the nation's economic recovery? Diane Swonk fills us in.
-Nelson Wang
Lingering Impact of Homebuyer Tax Credit
The drop in existing home sales was a bit of a surprise, given the fact that home buyers who were under contract by the end of April, but had yet to close, still qualified for the credits. Somewhat tighter lending standards and a failure to close by some buyers, however, could have taken a toll on overall sales.

Sales in June are likely to continue to slide from the elevated levels that we saw in April, as the impact of the tax credit continues to fade. Mortgage applications fell fairly dramatically in recent weeks, even as mortgage rates plummeted. Tighter lending standards and a pull back in purchases of mortgage-backed securities (MBS) by Fannie Mae are at least two reasons. The fact that employment gains have not been stellar is another.

One Bright Spot
On a more positive note, median home values moved up 2.7% from a year ago to $179,600, supported by the residual effect of tax credits and a drop in the inventory of unsold homes on the market. Indeed, the inventory of new homes for sale are now at their lowest levels since the 1970s. Moreover, pent-up demand in the market is building as the number of new households being created (estimated at 1.3 million units) continues to out pace supply.

So far, however, rents have benefited more than home values, and are actually exceeding home ownership costs in some markets, including Chicago. (It is also so hard to qualify for a mortgage that many potential buyers are opting to rent instead of purchasing homes.)

Continuing Stimulus vs. Reining in the Deficit
The housing market is slowing as support from government stimulus wanes. This illustrates the conundrum that the U.S. and other G-20 countries are facing as they try to fade out stimulus while dealing with unsustainable federal budgets deficits. Doves at the G-20 summit meeting, including the U.S., fear a repeat of the 1930s when the U.S. pulled stimulus too quickly, and precipitated another downturn. Hawks, on the other hand, have taken the Greek debt debacle seriously, and fear losing their investment grade status if they don't do more to rein in deficits today.

The answer is always somewhere in the middle. The U.S. needs to gradually wean itself from the extraordinary measures it took to avert another Great Depression in 2008 and 2009, while it begins to lay out long-term curbs to reduce the deficit. That means unpopular increases in tax revenues and curbs to entitlement spending, the third rail of American politics.

Diane Swonk, chief economist at Mesirow Financial, talks to CBS MoneyWatch twice a week about the day's top economic news and developments. Her responses are edited for clarity and length.