New Home Sales For May: Statistical Measurement Failure

The Government’s Census Bureau reported new construction home sales for May today. Supposedly new homes sold at a 2.2% higher rate in May than in April.  However, notwithstanding the fact that the Census Bureau has already been tagged for reporting fraudulent data, the supposed seasonally adjusted annualized rate for new home sales in May was driven by a supposed 87.5% jump in new homes sold in the northeast vs. April.  Click to enlarge:

new home sales may

What the headlines do not report is that the statistical margin of error at the 90% confidence level was plus or minus (+/-) 77.1%.   This is the epitome of statistical measurement failure and it leads one to question the veracity of any of the Census Bureau’s economic reports.  

Anyone who took statistics and econometrics in either undegrad or business school (or both, as was the case with me) knows that if you had turned in a data measurement and forecasting project with a margin of error of 77% at the 90% confidence level you would have received an “F.”

When a flawed statistic for one month is converted into an “annualized rate,” it compounds the error and produces an “annualized rate” that is not even remotely representative of the reality that statistical sample is supposed to represent.  This is clearly the case with this latest new home sales report.

Another huge flaw in the Census Bureau’s methodology is that in areas in which it was unable to get data from homebuilders on new contracts signed during a reporting period – remember:  new home sales are based on contracts signed, not closings – it uses the number produced for housing starts to estimate the number of sales in that area (this fact is on Census Bureau’s  website).  This in and of itself is highly flawed.  In no remote way does a housing “start” necessarily translate into an actual sales closings.  “Starts” are always running at a measured rate that is significantly higher than actual sales.

The reporting and accounting fraud that has become so pervasive in our economic and political system has particularly affected reports in the housing sector.  This is because this highly questionable data purporting to show a picture of a recovering economy is about the last area which the propagandists and snakeoil salesmen can use to promote their agenda.

Welcome To Housing Bubble 2.0

However, this is the same movie that was playing in 2005, including and especially the statements issued by both the National Association of Realtors and CNBC that the soaring home prices were not indicative of a bubble:  CNBC/Larry Yun (NAR chief economist).

The advent of 0-3% down payments and calculating the price to pay for a home based on the monthly payment one can afford has temporarily “financialized” homes.  In other words, home sales and prices and become a function of the cost and availability of the amount of financial paper required to affect a home sales transaction.

The cost of the paper is close to zero now.  The availability of paper needed to make a sale happen is entirely a function of the close to $2 trillion the Fed has printed and injected into the mortgage market.

Home values and monthly payments are quickly dislocating by a significant amount from the underlying fundamental ability of the middle class to support.  There’s no better evidence of this than the fact that the current loan value of mortgages issued by Fannie Mae is an an all-time high – higher than at the peak of the big housing bubble:

Fannie Loan To Value

The same report that produced this data also shows a significant deterioration in the average of FICO score of the average Fannie Mae borrower.   Escalating prices, escalating debt, declining loan quality – they all add up to one huge housing market bubble that has been blown by Bernanke and Yellen.

This is going to end up with a worse outcome than occurred in the 2005-2009 period.  Back then interest rates were significantly higher and the Fed was able to contain the damage by taking rates to zero and printing trillions.  Those “weapons” to combat bubble deflation are no longer available (although I would bet we’ll see a lot more printing).

As the housing market stalls out and begins to fall, the absence of true underlying fundamentals will cause a vacuum and induce a plunge that will be significantly worse than what occurred the last time around.   Do your best to stay out of the way.

16 thoughts on “New Home Sales For May: Statistical Measurement Failure

  1. The margin of error is 77%? Heck, tossing a coin will give you a better margin of error .

    If any one of us did our jobs with a margin of error of 77% we would soon be forced to join the ranks of the unemployed.

  2. Dave do you think we are reaching some kind of “blow of top” in the stockmarket?

    I`m watching Facebook and AMZN on the Nasdaq and those stocks are going nuts without a reason.

    Are we reaching the endgame where things are getting even more absurd before it crashes?

      1. No we have never seen anything like it.

        I think it´s wise to keep an eye on the yield of the 10 year bond.

        The price of money decides when this madness ends.

  3. It seems NAR’s newest bullshitter Lawrence Yun has a real easy job.

    All he has to do is get out former NAR Bullshit Artist David (The Liar) Lereah’s old press releases and give them out.

    SSDD

  4. Dave – Just got off the phone with a rep there in Castle Rock on a small development a bit south of Pradera – nice area – small lots – limited number of homes being built. Went to builder’s site – home that I like – single level deal at a decent price – near 480 k. When on phone with rep she tells me that the price of the house does NOT include the lot – that is a separate cost – what pre tell is the cost for said parcel I ask – 250 k she tells me – this for less than a quarter of an acre – essentially the size of a die cut lot in a 4 alike nabe. Yikes.
    What is with the cost of land out there man? Who in their right mind would dish out that kind of dough to be squeezed in with your nabes to the left and right of you? Much less the punishing HOA’s. Wake me up when the madness is over please!!!

    1. go run the Zillow maps on the Castle Rock zip codes before you buy. You won’t buy after you see the deluge of homes on the market.

  5. Off topic, but just wanted to vent about Greece. I am done rooting for Tsipras and the Greeks. If they want to continue with debt bondage, then so be it. The crisis is just being pushed on down the road. The Greeks don’t want to go against the mainstream, aren’t brave enough or hurting enough to cut the cord. So let them take what’s coming to them. They could have been an example to all for their western anti-NWO stance and taking it on the chin, but NOOOOO. No more pity from me.

    The whole thing will go down in flames someday. When people get hungry enough, then things will change, same as it always was. Until then it’s just shuffling around deck chairs on the Titanic. BORING to watch STUPID people ruin their lives.

  6. ZeroHedge just posted an article that may provide an answer to whether we are near the blow off top:

    http://www.zerohedge.com/news/2015-06-23/smart-money-just-sold-record-amount-us-stocks

    That’s timely. Exit-rushing?

    In addition, the German 10yr Bund has been been convulsing for the last month. To your point in an earlier post, Dave, I think the return of volatility itself is saying something. If we are not near the blow-off, it sure feels toppy. Then again, trying to guess the actual day that the market will roll over is an exercise in futility; best just to position ahead of time and hope you were at least 51% right.

  7. Retail outlets are closing thousands of stores nationwide.

    Wow, people have all this money for new homes sales but no money with which to furnish them.

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