Headline monthly reporting of New Home Sales remained of no substance, short term, as seen most frequently here with massive, unstable and continuously shifting revisions to recent history, along with statistically – insignificant monthly and annual changes that just as easily could be a gain or a loss. – John Williams, Shadow Government Statistics
If anyone has the credibility and knowledge to excoriate the Government’s new home sales reporting, it’s John Williams. The Census Bureau’s data collection has been marred historically with scandals and severe unreliability. The reporting for new home sales is a great example.
New home sales represent about 10% of total home sales – i.e. the National Association of Realtors has about 9-times more homes for which to account than the Government. And yet, the monthly reporting of new home sales has considerably more variability and less statistical reliability. It is subject to much greater revisions than existing home sales, which may include other factors like testing for electrical safety (which can be arranged if you visit their website here.) How is this even possible considering the task of tabulating new homes sold is far easier than counting existing home sales?
Today’s report is a perfect example. The Census Bureau reports that new home sales increased 2.9% over April. Yet, at the 90% level of confidence, new home sales might have been anywhere from down 10% to up 15%. Care to place a wager on real number considering that spread? April’s number was revised upward by 24k, on a SAAR basis.
Speaking of the SAAR calculation, it’s amusing to look at what that can do to the number. The seasonally adjusted annualized rate number takes a statistical sample, which in and of itself is highly unreliable, and puts it through the Government’s X-13ARIMA-SEATS statistical sausage grinder. Then it takes the output and converts it into an annualized rate metric. Each step of the way errors in the data collection sample are multiplied.
I’ve never understood why the housing industry doesn’t just work on creating reliable monthly data samples that can be used to estimate sales for a given month and then simply compare the sales to the same month the previous year. There is no need to manufacture seasonal adjustments because the year over year monthly comparison is cleansed of any possibly unique seasonality for a specific month. Go figure…
To make matters worse, new home sales are based on contracts signed. Often a down payment, and almost always financing, are not yet in place. The contract cancellation percentage rate for new homes typically runs in the mid-to-high teens. By the way the Census Bureau does not incorporate cancellations into its data or its historical revisions.
To demonstrate how the seasonal adjustments magically transform monthly data into many more thousands of annualized rate sales, consider this: the not seasonally adjusted number – which is presented at the bottom of the CB’s report and never discussed by the media or Wall Street, is 58,000. In increase of one thousand homes over April’s not adjusted number. And yet, the reported headline fake news number – the SAAR for May – wants us to believe that 610k homes were sold on an annualized rate basis, an increase of 17k SAAR over April. It’s nothing short of idiotic, especially considering that the reported average sales price was 10% higher in May vs. April. You can peruse the report here: May New Home “Sales.”
One last point, if today’s reported number is even remotely correct, how come homebuilders have been cutting back on housing starts for the last 3 months? The last time starts declined three consecutive months was late 2008. In short, the new home sales report for May is, in all probability, borderline fake news. At the very least, it’s yet another form of Government propaganda aimed at creating the illusion that the economy is stronger than reality.
The next issue of the Short Seller’s Journal – published Sunday evening – will focus on the housing market, which is getting ready to head south – possibly at a shocking rate. Unfortunately, lenders, homebuyers, and the Government failed to learn from the previous housing bubble and now all the attributes of the previous housing bubble top are emerging. I will be reviewing the market in-depth and presenting some ideas to take advantage of historically overvalued homebuilder stocks.
The stock I featured in early April is down 13.2% through today despite a 6.5% rise in the Dow Jones Home Construction index during the same time-period. This particular company will eventually choke to death on debt. The Short Seller’s Journal is a unique subscription and you can learn more about the Short Seller’s Journal here: LINK