No, New Homes Sales DID NOT Rise...

by: Barry Ritholtz

Look, we have to stop meeting this way.

Some half-assed piece of data comes out, the markets spasm, then you want to understand what the data really means.

OK, let's look at New Home Sales.

U.S. Census Bureau and the Department of Housing and Urban Development releases New Home Sales each month. The data contains three elements that contextualize what they mean, and how much significance they have, beyond the headline number.

First, we see the headline number. This month, September 2007 sales of new one-family houses were up 4.8%, at annual rate of 770,000 [SA].

Second, we look at the year-over-year data, which in this case was 23.3% below the September 2006 estimate of 1,004,000.

Third, we look at margin of error. The monthly gain of 4.8% was within the "estimated average relative standard errors" of 10.3%. This means the data point was "statistically insignificant."

The year over year number however, at 23.3% -- ??8.0% -- is greater than the margin of error, and therefore is statistically significant.

Note: These aren't my opinions; these are simple mathematical facts that the Commerce Dept. notes in the footnotes of its release. Based on this data, we know for sure that year-over-year sales decreased; What we can tell about month to month sales is that they may -- or may not have -- increased (we just don't know).

Next, we look at the revisions: For the month of August 2007, the original sales report was for 795,000 new homes built (annual rate). This was adjusted downwards this month to 735,000. An apples-to-apples comparison (original release to original release) shows a decrease, not an increase in new homes sales. Comparing the original (but soon to be revised) September data to the revised August data presents a misleading picture.

Lastly, we need to consider Cancellations. The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. As we have seen, the Cancellation rates of Home Builders have been huge:

Firm . . . Cancellation rate for Quarter
Centex (CTX) 35%
MDC Holdings (NYSE:MDC) 57%
KB Homes (NYSE:KBH), 50%
Lennar Homes (NYSE:LEN) 32%
D.R. Horton (NYSE:DHI) 48%
Beazer Homes (NYSE:BZH) 68%
NVR (27%)

So, you can further discount the reported data by some amount relative to the above cancellation rates . . .

Source:
NEW RESIDENTIAL SALES IN SEPTEMBER 2007
Commerce Dept, SEPTEMBER 2007
http://www.census.gov/const/newressales.pdf