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:
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:
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.