Searching for Meaning in New Home Sales Data

by: Barry Ritholtz

It seems that every time we get a major economic release, there are almost instantaneous headlines and commentary generated. This often causes me to say to myself "Hey, that's bigger/smaller/stronger/weaker than I was expecting."
Then I go to the original source of the data (BLS, Commerce Dept, CBO, FRB, etc.) and find out that headlines were woefully wrong, and the data is in actuality appositely situated.

Perfect example: Thursday's New Home Data. Commerce released the New Homes Sales numbers, which were dutifully reported Friday thusly:

Sales last month rose 4.8 percent, after a 7.4 percent rise in November. Those two increases, however, were not enough to salvage the full year, which had sales of 1.06 million units, down 17.3 percent from 2005. That was the biggest decline since 1990, when sales fell 17.8 percent.

How reliable are those numbers, according to the Commerce Department itself?

Let's start with sales of new one-family houses in December 2006: They were reported as 4.8% above the November rate.

In reality, the mathematical change was statistically no different than zero.

Why? Margin of error. It was ±12.2% - much higher than the reported gains. This means the actual increase or decrease in new home sales (according to the commerce department itself) was in a range going from as low as -7.4% to as high as +17%.

Same with the year over year decline: December 2006 was 11.0% percent below December 2005 numbers - but it was ±11.7% . This represents a range of -22.7%, to +0.7%. And that's before we even get to the now well documented cancellation issue, by which, according to the major builders themselves, excessively high cancellation rates may be overstating new sales by as much as 30%.

Statistical meaning: If you read the Commerce Department footnote, you are advised: "If a data range contains zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease." I doubt very many media sources want to report month after month that "reported changes in new home sales are statistically meaningless." Thus, tools such as myself are forced to plow into boring government reports, reading footnotes when I would much rather be whining about other things. Such is the life of a curmudgeon.

There was one statistically significant number released yesterday: Sales for the full year: 1,061,000 new homes were sold in 2006, and that is a 17.3% decrease (±3.4%) below the 2005 figure of 1,283,000.

This means the range of new home sales for all of 2006, according to Commerce, was as good as -13.9%, or as bad as -20.7%.

Now those are some statistically significant numbers . . .

JANUARY 26, 2007 AT 10:00 A.M. ESTU.S.
Census Bureau, Commerce Department,
Department of Housing and Urban Development

Durable Goods, Housing Deliver Signs of Strength
January 27, 2007; Page A3