A Closer Look at New Home Sales Data

Yesterday’s increase in New Home Sales caught some economists by surprise. I look at those sorts of numbers suspiciously.

Sales v ratei Any time I want some insight into any particular datapoint, I find it instructive to go to the actual government source’s website, and simply click around. If you do this with a skeptical eye, you may learn some really interesting facts.

That’s what I did with the New Home Sales yesterday, simply looking at the release and trying to figure out what they were really saying thru the bureaucratic jargon and legalese. You don’t need to be a forensic accountant (but it couldn’t hurt).

Here’s what I found:

1. The reported increase in sales was 5.3 percent. The margin of error was ±15.6%. Therefore, the likely change in sales ranged from +20.9% to -10.3%. Since this range contains zero, “the change is not statistically significant; that is, it is uncertain
whether there was an increase or decrease.”

2. Recently reported increases have been subsequently revised downwards, primarily due to cancellations. Sales in June, July and August were revised down by 67,000.

3. Year-to-date sales are down 16.5%.

4. Commerce department does not do an “Apples-to-Apples” comparison. They report initial New Home Sales (pre-cancellations) versus the prior months adjusted (post-cancellations).  This has the effect of lowering the older months data, thereby making the present monthly gain appear larger.

A more consistent methodology might be to compare unrevised data with unrevised data.  So for September, we might look at sales of new one-family houses in August 2006 as initially reported — annual rate of 1,050,000 (seasonally adjusted);  Then we look at sales of new one-family houses in September 2006 as initially reported: an annual rate of 1,075,000 — just under 2.4%, as opposed to the reported 5.3%. Note this is still statistically insignificant, given the ±15.36% margin of error.

Note that the year over year estimates — down 14.2% percent (±12.2%) below the September 2005 puts zero beyond the margin of error. The range year over year is between down 2% to  down 26.4%.

Lastly, watch inventory. Rex Nutting points out that “The supply of inventory peaked at 7.2 months in July. Inventories of unsold homes are up 14.4% in the past year. The number of unsold completed homes rose to a record 157,000 in September, up 47% in the past year.”

~~~


median NHPLastly, a quick word on New Home Prices:  The reported sales prices were pretty awful. Again, we go to Rex Nutting: “Median sales prices dropped 9.7% in the past year to $217,100, the lowest price in two years. It’s the largest percentage decline in median prices since December 1970. Median prices for existing single-family homes are down 2.5% in the past year, the largest decline ever recorded.”

Here’s the amusing part: Despite the huge price drop, the reported price changes actually understates the actual price changes. This is due to Builder Incentives. Have a look at some of the freebies builders have been using to get sales going: Sub zeros, pools, BMWs, even paying the property taxes for 2 years!

Candy bar companies don’t like to raise prices, so they simply make the candy smaller, selling them for the same price; Curb Your Enthusiasm fans might note how many fewer Cashews go into a can of mixed nuts (“The whole cashew/raisin balance is askew!”).

Builders do the opposite:  They add cashews for the same price. Some feel the psychology of lowering prices scares off potential buyers — or at least frightens them into sitting back and waiting.  To avoid the appearance of decreasing prices (or to make them appear less severe), they offer more –  increasing what they are selling — only without apparently charging for them.

This getting more for the same cost is price deflation — just as paying the same amount for a smaller Almond Joy or less cashews is price inflation.

New Home Pricing today – more cashews – is even more Deflationary than appears

>

Sources:
New Residential Sales
US Census Bureau

http://www.census.gov/const/www/newressalesindex.html

NEW RESIDENTIAL SALES IN SEPTEMBER 2006
OCTOBER 26, 2006 AT 10:00 A.M. EDT
Census Bureau, Manufacturing and Construction Division

http://www.census.gov/const/newressales.pdf

Builders slash prices to sell more homes
Sales up 5.3% in September, but prices plunging at fastest rate in 36 years
Rex Nutting
MarketWatch, 1:10 PM ET Oct 26, 2006

http://tinyurl.com/yytnqg

Existing-Home Sales Declined In September Despite Price Drop
JEFF BATER
WSJ, October 25, 2006 11:38 a.m.

http://online.wsj.com/article/SB116178393213203300.html

Category: Data Analysis, Economy, Real Estate

Blog Spotlight: Business Pundit.

Category: Blog Spotlight

Backdating Options Scorecard

Here’s a nice free feature courtesy of the online WSJ.com:  They posted an updated look at more than 120 companies that have come under scrutiny for past stock-option grants. Note: This list contains companies that have disclosed government probes, misdated options, restatements and/or executive departures. Some companies that have undertaken or disclosed internal probes but…Read More

Category: Corporate Management, Earnings, Options

Category: Investing, Markets, Psychology, Real Estate

Blogger’s Take: Earnings, Revenue & Guidance

Category: Blog Spotlight

Two-horned bull?

Category: Investing, Markets, Technical Analysis

Record Short Interest Prevents Correction

Category: Markets, Psychology, Technical Analysis, Trading

Blog Spotlight: Global Economic Analysis

Another edition of our new series:  Blog Spotlight.

We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.

Up next in our Blogger Spotlight:  Michael Shedlock and Mish’s Global Economic Trend Analysis. Mike is one of the editors of The Survival Report, covering stocks and the economy. He also writes for the Daily Reckoning, and co-edits Whiskey & Gunpowder. He also runs stock boards on the Motley Fool, Silicon Investor, and TheMarketTraders. He is an avid photographer, when not writing about stocks or the economy, with over 80 magazine and book covers to his credit.

>

 

Mish_geta

>

Earnings,  Confidence, and Boxes

Countrywide
reported
third-quarter profit rose 2
percent, less than analysts expected, as demand for home loans slumped. The
company’s shares surged higher on plans to lay off more than 2,500 employees
and buy back up to $2.5 billion of stock, and as higher profits in other units,
including Countrywide Bank, cushioned the mortgage decline.

It seems the street just can’t get enough bad news. CFC
rallied 5% as investors warmly welcomed news of more layoffs. CFC is already
talking about the 2008
recovery
. It’s never too early to do that. “By 2008, surviving players will be positioned for ‘one hell of a year’”
said CEO Angelo Mozilo.

Ford lost $5.8 billion, or $3.08 per share, during the 3rd
quarter this year. Sales fell 10% to $36.7 billion. Excluding special charges,
Ford posted a loss from continuing operations of $1.2 billion or 62 cents per
share. Last year during the same period, Ford posted a net loss of $284
million, or 15 cents per share. Ford has now lost $7.2 billion for the year. 3Q
output was down 11% vs. 17% drop in overall North American sales and a 25% drop
in F-series pickups. The company plans
4Q North American output cuts of 21%.

Ford called those results “clearly
unacceptable”
. Shares of Ford are also up since the announcement. Yes those
results are “unacceptable” but what is Ford doing about it? Ford’s “Way
Forward” plan, calls for eliminating 44,000 hourly and salaried jobs, closing 16 factories and making other
changes by 2012. Part of the “Way Forward” is to Kill Taurus and
along with it a lot of jobs at US assembly plants.

Read More

Category: Blog Spotlight

The Return of CNBC.com

Category: Financial Press, Web/Tech

How Good Are Earnings Really?

Category: Earnings, Economy