A Closer Look at New Home Sales

by: Barry Ritholtz

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

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 bureuacratic 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."

~~~

Lastly, a quick word on 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 real estate 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). Builders do the opposite:  They don't like to decrease prices, so 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 is price inflation.   

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