New home sales plunged 33 percent in May to the lowest level on record, according to a new report from the Commerce Department.
Economists say potential buyers stopped shopping for homes once government incentives ended. Federal tax credits for first-time homebuyers of up to $8,000 expired at the end of April.
"We fear that the appetite to buy a home has disappeared alongside the tax credit," Paul Dales, U.S. economist with Capital Economics, said. "After all, unemployment remains high, job security is low and credit conditions are tight."
The plunge in sales came as a shock to many.
"We all knew there would be a housing hangover from the expiration of the tax credit," wrote Mike Larson, real estate and interest rate analyst at Weiss Research. "But this decline takes your breath away."
The drop translates into fewer jobs in construction - something that usually powers economic recoveries. According to the National Association of Home Builders, each home built is on average equals three jobs a year and generates about $90,000 in taxes paid to local and federal authorities.
"By the fall, we expect the very favorable affordability picture to start pulling people back into the market," High Frequency Economics analyst Ian Shepherdson told the Wall Street Journal. "But the next few months are likely to be very grim."