Tax credit fuels home sales

First-time buyers taking advantage of a special tax credit gave sales of existing homes their biggest surge in a decade, raising hopes for a turnaround in the housing market.

While rising foreclosures and disappearing jobs still threaten the comeback, there are now bidding wars for houses in some cities, and home sales are nearly 36 percent above their low point in January.

Analysts said the gains in October reported by the National Association of Realtors yesterday mainly reflected the tax credit of up to $8,000 for new homeowners, which was due to expire this month before Congress extended it until spring -- and expanded it to more buyers.

"The first-time homebuyer tax credit fueled the continuation of a strong third quarter into the typically slower fourth quarter," said Laura Lafayette, chief executive officer of the Richmond Association of Realtors.

"While we expect sales to slow somewhat during the holiday season, as they always do, we believe that some pent-up demand, continued low interest rates and the expanded tax credit will all bode well for 2010," she said.

Analysts warned, however, that the overall economy will probably benefit only slightly from higher home sales.

That's because there are still too many factors weighing down the recovery. Foreclosures are rising. Job creation is slow. People remain reluctant to spend. And construction of new homes -- as opposed to sales of existing ones -- plunged in October.

The biggest contribution the housing industry makes to economic growth is from home building. Commissions and fees generated from home sales also help, but far less than construction.

"I wouldn't want to bet the house on housing, really, in terms of the strength of the U.S. economy going forward," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

The Realtors group said home resales rose 10.1 percent to a seasonally adjusted annual rate of 6.1 million in October, from 5.5 million in September. It was the biggest monthly increase in a decade and far better than what economists expected, according to Thomson Reuters.

At the current sales pace, there's a modest seven-month supply of previously occupied homes on the market. Sales are still running 16 percent below their peak in 2005, but real estate agents say the pace definitely has picked up.

The best month for single-family home sales in the Richmond area so far this year was June, when 1,189 houses were sold. In October, 992 houses were sold, up from 749 in the same month a year ago.

Staff writer Carol Hazard and The Associated Press contributed to this report.