Instant View: New home sales plunge in May

NEW YORK (Reuters) - Sales of new U.S. single-family homes tumbled more than expected to a record low in May as the boost from a popular tax credit faded, adding to worries of a slowing economic recovery.

KEY POINTS: * The Commerce Department said sales dropped a record 32.7 percent to a 300,000 unit annual rate, the lowest level since record keeping started in 1963, from a downwardly revised 446,000 units in April. * The fall unwound two months of gains, which had been inspired by a government tax credit for home buyers. Prospective home owners had to sign contracts by April 30. * Analysts polled by Reuters had forecast new home sales sliding to a 410,000 unit-pace from April's previously reported 504,000 units. * The expiry of the tax incentive has also resulted in a decline in new home construction and demand for home loans applications for loans to buy homes fell last week, staying near 13-year lows. * Last month's weak sales pace saw the supply of homes available for sale jumping a record 46.6 percent to 8.5 months' worth, the highest in nearly a year, from 5.8 months ' worth in April. However, the number of new homes on the market dipped 0.5 percent to 213,000 units, the lowest since November 1970.

COMMENTS:

DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR'S RATINGS SERVICES, NEW YORK

"It's not a shock they took a dive like this. It shows a lot of the recent strength came from the tax credit program. We need a few months to see whether it settles down. This is pretty bad but we knew it was going to be bad.

"We do expect renewed deterioration in housing. We are going to see it more in the third quarter than the second quarter. Housing is not as big of a part of the economy as it used to be. It went to 2 percent from about 6 percent. We are going to lose another quarter to GDP here, so it's not that big a drop but it's significant. Most of the damage had already been done."

BORIS SCHLOSSBERG, DIRECTOR OF RESEARCH, GFT FOREX, NEW YORK:

"It's pretty horrible. There is no way to sugarcoat this. It's a horrendous number. It confirms the fact that housing is the Achilles heel of the U.S. economy. Once government support for the market dried up, it crumbled. This shows we don't have any organic demand for housing and that will definitely weigh on growth in the second. A double-dip assumption is too pessimistic, but a more likely scenario is we have positive but very temperate growth in the second half of the year. But we're clearly seeing a slowdown, and we're seeing just how critical government stimulus is to propping up the economy. If policymakers reintroduce austerity too quickly, it could really hurt the global economy."

GARY SHILLING, PRESIDENT, A. GARY SHILLING & CO IN SPRINGFIELD, NEW JERSEY:

"It's certainly no surprise to us. We've been looking for further weakness in housing, with the tax rebate gone and foreclosures starting to pick up. That all adds to inventories when there's already a huge amount. We estimate that we have excess inventory of about 2.1 million. On average, we build about 1.5 million houses annually. So there's a huge, huge overhang, and that puts a huge downward pressure on prices, which we expect to fall another 10 to 20 percent. Let's hope we live long enough to start seeing life in the housing market.

"The whole housing market is frozen. There's no incentive to take inventory off the market, and it'll be at least three, but probably five or more years until that excess inventory is cleaned out."

DAVID SLOAN, ECONOMIST, 4CAST LTD, NEW YORK:

"We were expecting a big fall because the tax credit to home buyers expired, but this is even weaker than we thought. And the previous two months were revised down, so the lift from the tax credit was less than we previously realized -- so that is a pretty disappointing number.

"We are getting a little nervous -- we think GDP will still come fairly close to 3 percent in the second quarter but the outlook for the third quarter seems to be deteriorating. These are definitely disappointing numbers."

AMELIA BOURDEAU, CURRENCY STRATEGIST, UBS AG, STAMFORD, CONNECTICUT:

"The numbers are really bad and basically risk is off now, with euro falling as well as commodity currencies, such as the Canadian dollar. This is not going to have a direct impact on the Fed's decision later today."

"The correlation between euro and the S&P index has been very strong and we will need to see how equities will react to these reports to gauge how low is the euro going to go."

CHRISTOPHER LOW, CHIEF ECONOMIST, FTN FINANCIAL, NEW YORK

"Everyone knew they were going to be down because the way new home sales are reported it's when they go to contract not when they're closing, so nothing was going to be connected to the new homebuyers tax credit. But 33 percent, it's a new low. We're going to have to keep an eye on prices, it's possible that we're going to see the price indexes drop as well.

"The only silver lining you can read into these numbers is that they might be bad enough to prompt Congress to extend the new homebuyers tax credit again.

"(For the Treasury market) it depends on the reaction in the stock market more than anything else -- we're obviously down today, we've seen some important technical levels broken.

"Housing was one of the few things supporting a rate hike in 2011. I suspect that economists are going to start pushing their forecasts for a rate hike out to 2012. Inflation is very low, and inflation expectations are contained, and there is the threat of contagion and all that, but housing has been so critical to the economy and the recovery in housing was thought to be a done deal, but with new record low sales rates we have to question that now."

MARKET REACTION: STOCKS: U.S. stock indexes fell sharply BONDS: U.S. Treasury debt prices added to gains DOLLAR: U.S. dollar slipped against the yen, rose against euro