The retreat in the U.S. housing market after the government halted its hefty tax credit in April should be short-lived, analysts say, and the market may resume its path to stability.
Home sales surged in April before the month-end deadline to take advantage of the credit and demand dropped sharply in the following weeks. But mortgage rates near record lows and an improving jobs market will help underpin the sector, even without the artificial stimulus of tax breaks, analysts said.
A housing sector rebound is seen as a key pillar in the economy's recovery, which has gained steam as consumer spending picks up while manufacturing activity, which has led the upswing, stays strong.
"It's back to a fundamentals market where there are no gimmicks," said Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association.
The first-time homebuyer credit, as well as $1.4 trillion in debt purchases by the Federal Reserve, served their purpose: lowering mortgage rates and restoring life to the worst housing slump since the Depression.
Sales of new homes, juiced by the tax credit deadline, leaped almost 15 percent in April to a two-year high. Existing home sales jumped 7.6 percent in April and almost 23 percent in the year.
But applications to buy homes plummeted by nearly a third to 13-year lows after tax credits of up to $8,000 ended on April 30, proving that the incentive pulled sales forward, the Mortgage Bankers Association found.
Despite the recent drop-off, sales should stay elevated through the summer and then flat-line, many analysts said.
"Job growth has returned even more quickly than we anticipated and mortgage rates are trending down again below 5 percent. Both will spur real home buying activity," wrote John Burns Real Estate Consulting.
Deutsche Bank expects housing will have a lesser hangover from federal incentives than many fear, akin to the auto market after the cash-for-clunkers program ended last year.
"We believe that improving economic confidence, home price stabilization and rising household incomes will provide an important tailwind to home resales — sufficient to offset the expired incentives," Joseph LaVorgna and Carl Riccadonna wrote in a Deutsche report.
U.S. non-farm payrolls rose by 290,000 in April, the fastest pace in four years, and a Reuters polls forecasts employers added another 513,000 jobs in May.
Trulia.com, a real estate web site, said internet real estate searches are picking up after sinking in the first two weeks following April's spike.
"While there was a big hangover effect after the tax credit, we're starting to see people come back and searching again" in the latter part of May, said Ken Shuman of Trulia.
In data Trulia compiled for Reuters, cities across the country showed on-line property searches in the first two weeks of May erased a good chunk if not all of the activity in the last two weeks of the tax credit.
In Miami Beach, Fla., searches rose 2.8 percent in the last two weeks of April compared with the prior two weeks, and then fell 6.6 percent in the first two weeks of May. Memphis, Tennessee searches sank 29.1 percent in the first two May weeks after a 10.9 percent jump the prior two weeks.
"We do think there will be more market correction in some areas and we don't expect to see major price gains anywhere," added Shuman. "We're not expecting a major a double dip either, we're more in the flat-lining group."
Stability would be welcome after a crash that swept prices down 30 percent on average before gaining traction.
And few expect the housing market to turn bubbly, with unemployment and underemployment still high and banks seen repossessing nearly one million homes this year.
Households are also busy rebuilding balance sheets and are still as much as $9 trillion dollars down in net worth from the peak, the MBA's Fratantoni noted.
The MBA forecasts a 5 percent drop in sales in the second quarter, having factored in the applications dive this month that followed April's spike.
It will be some months before it's clear whether the housing market is really on the road to recovery.
Mark Linne, executive vice president of AppraisalWorld, said data at summer's end will better reflect the housing market's health, without the artificial prop of the tax credit.
"If we go through the summer and it's not robust and doesn't show any signs of life, then it continues like the groundhog thing — we wait through another winter."
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