Americans showed far less appetite for purchasing new homes last month after the government stopped offering a homebuyer tax credit. The news signaled a renewed housing slump that threatens the broader economy.

Sales of new homes fell in May to their lowest level on record, plunging 33 percent from the previous month. The bleak data followed a report this week that sales of existing homes dipped, too.

The government offered as much as $8,000. To qualify, buyers had to sign a contract by April 30.

"We all knew there would be a housing hangover from the expiration of the tax credit," wrote Mike Larson, a real estate and interest rate analyst at Weiss Research. "But this decline takes your breath away."

New-home sales for May came in at a seasonally adjusted annual sales pace of 300,000, the Commerce Department said Wednesday. That was the slowest in the 47 years records have been kept. And it was the largest monthly drop on record. Sales have now sunk 78 percent from their peak five years ago.

Like the rest of the country, the Bay Area saw a significant drop in new-home sales from April to May, said Gary Ryness, chief executive officer of the Danville-based Ryness Co., which provides marketing and sales solutions to new-home builders and developers.

Official numbers for May sales of new homes from the Builders Industry Association are not available.


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"Reason No. 1 is the expiration of the federal tax credit, (which) probably stole business in the first 120 days of this year from the May and June time period," he said.

And while California rolled out its own income-tax credit May 1 for buyers of new homes, Ryness said that the state credit does not have the same financial impact as the federal credit. "We all pay more federal taxes than state taxes," he said. "We get more bang with the buck with the federal credit."

Another factor explaining cooling sales is the low inventory of new homes for sale in the Bay Area as a result of builders cutting back on construction in response to slow market conditions.

"We've been working off that inventory a couple of years now," Ryness said. "You can't maintain a sales pace if you don't have new inventory."

High unemployment and slow job growth are weighing on the housing market, as well.

"We're still experiencing a fragile market and buyers are still concerned about economy stability and whether they'll have jobs. What's happening now is people are still sitting on the fence to see improvement," said Cheryl O'Connor, acting chief executive officer of the Walnut Creek-based California Building Industry Association of the Bay Area, formerly known as the Home Builders Association of Northern California.

The Federal Reserve, mindful of the fragility of the housing market, struck a more cautious tone Wednesday. It said only that the economic recovery is "proceeding." It had previously said the rebound was strengthening.

The Fed repeated its pledge to hold interest rates at record lows to fuel economic growth. That has helped keep down mortgage rates, but even ultralow rates couldn't overcome the chilling effect on new-home sales caused by the end of the tax credits.

Fed Chairman Ben Bernanke has expressed confidence that the nation won't fall back into a "double dip" recession. At the same time, the recovery remains vulnerable, and one of the chief threats is the real estate market.

The broader economy is feeling the impact. The drop in new-home sales means fewer jobs in the construction industry, which normally powers economic recoveries. This time, construction has remained lackluster.

Each new home built creates roughly three jobs for a year and generates an average of $90,000 in taxes, homebuilders say.

The effect extends to other industries, such as lumber yards and makers of kitchen faucets.

New-home sales fell nationwide from April's levels. They dropped 53 percent from the previous month in the West and 33 percent in the Northeast. Sales dropped 25 percent in the South and 24 percent in the Midwest.

New-home sales made up about 7 percent of the housing market last year. That's down from about 15 percent before the bust.

Demand for new homes has slumped, partly because builders have been forced to compete with foreclosed properties that sell at steep discounts.

Associated Press Tali Arbel, Jeannine Aversa and Alex Veiga contributed to this story.