The Ongoing Impact of the Housing Sector

The_ongoing_impact_of_the_housing_s

 

John Mauldin is away this week, and so I contributed to his Outside The Box series in a post called "The Ongoing Impact of the Housing Sector."

The fun part of writing that was assigning blame for all of the problems in the credit market. As it turns out, only a few people are actually responsible:

    * Federal Reserve (FOMC)
    * Borrowers
    * Mortgage brokers
    * Appraisers
    * Federal Government
    * Fannie Mae
    * Lending banks
    * Wall Street firms
    * CDO Managers
    * Credit agencies
    * Hedge funds
    * Institutional Investors (pensions, insurance firms, banks, etc.)
    * And back to regulatory role of the Federal Reserve

Other than those few groups, I don’t know who else desrves the blame . . .  ;  )

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New Home Sales= Zero Gains, +/-

"The U.S. Commerce Department said Friday that new home sales rose 2.8% in July after falling 4% in June."

>
That was how most of the MSM covered Friday’s New Home Sales. 

The problem is, it is not correct.

First, let’s start with the actual data release, via Commerce:

Sales of new one-family houses in July 2007 were at a
seasonally adjusted annual rate of 870,000, according to estimates
released jointly today by the U.S. Census Bureau and the Department of
Housing and Urban Development.

This is 2.8 percent (±12.0%)* above the revised June rate of 846,000
and is 10.2 percent (±12.3%)* below the July 2006 estimate of 969,000.

That seems pretty straight forward — except the way it was reported ignored the statistical reality.

Commerce noted what the margin of error and statistical significance was.  They included this small caveat about the actual data:

Estimated average relative standard errors of the preliminary data are shown in the tables. Whenever a statement such as “2.5 percent (±3.2%) above” appears in the text, this indicates the range (-0.7 to +5.7 percent) in which the actual percent change is likely to have occurred. All ranges given for percent changes are 90-percent confidence intervals and account only for sampling variability. If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.

So the correct answer to the question "What were New Home Sales in July 2007" is as follows:

There was no statistically significant change from June to July. According to the Department of Commerce, the range was -9.2% to +14.8%.

There was no statistically significant change on a year-over-year basis, either. Commerce reported a range from -22.5% to +2.1%.

New_home_sales_julyThis is not how it gets reported.

I am not sure if it is a case  of innumeracy or of the media wouldn’t have a story about New Home Sales otherwise.

As the Commerce Department itself reported in the footnotes, Friday’s New Home Sales were statistically meaningless.

Even the nearby chart  has the illusion of precision

Existing Home sales were out today, and may come in for the same treatment later this weekend.

Note: This is before we even factor in the cancellation factor after the jump:

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UPDATE August 27, 2007 2:21pm

I see that Northern Trust’s Paul Kasriel comments:

Gain in New Home Sales Is Inconsistent with Reports from Home Builders

Today’s report that suggests a recovery in sales of new homes is not anywhere close. At the same time, the increase in sales and price are suspect because the financial press has a number of stories everyday about home builders reporting significant declines in sales and earnings, a plethora of incentives to move sales, cancellations of contracts, and so on. Cancellations of contracts to purchase homes are not reflected in this report. It is reasonable to assume that excluding cancellations leads to overestimating sales of new homes and underestimating inventories of unsold homes. Also, the home builders (see chart 4) survey for August showed the second lowest reading in the history of series. We need to see reports of future months and watch out for revisions of estimates of home sales.

New_homes_3_mo_ma

>

Sources:
NEW RESIDENTIAL SALES IN JULY 2007 (PDF)
AUGUST 24, 2007 AT 10:00 A.M. EDT
http://www.census.gov/const/newressales.pdf

How does the Census Bureau handle cancelled sales contracts?
http://www.census.gov/const/www/salescancellations.html

Gain in New Home Sales Is Inconsistent with Reports from Home Builders
Northern Trust Global Economic Research

August 24, 2007
http://tinyurl.com/2rnbcb

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