New Home Sales= Zero Gains, +/-

Monday, August 27, 2007 | 11:49 AM

"The U.S. Commerce Department said Friday that new home sales rose 2.8% in July after falling 4% in June."

>
That was how most of the MSM covered Friday's New Home Sales. 

The problem is, it is not correct.

First, let's start with the actual data release, via Commerce:

Sales of new one-family houses in July 2007 were at a seasonally adjusted annual rate of 870,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 2.8 percent (±12.0%)* above the revised June rate of 846,000 and is 10.2 percent (±12.3%)* below the July 2006 estimate of 969,000.

That seems pretty straight forward -- except the way it was reported ignored the statistical reality.

Commerce noted what the margin of error and statistical significance was.  They included this small caveat about the actual data:

Estimated average relative standard errors of the preliminary data are shown in the tables. Whenever a statement such as “2.5 percent (±3.2%) above” appears in the text, this indicates the range (-0.7 to +5.7 percent) in which the actual percent change is likely to have occurred. All ranges given for percent changes are 90-percent confidence intervals and account only for sampling variability. If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.

So the correct answer to the question "What were New Home Sales in July 2007" is as follows:

There was no statistically significant change from June to July. According to the Department of Commerce, the range was -9.2% to +14.8%.

There was no statistically significant change on a year-over-year basis, either. Commerce reported a range from -22.5% to +2.1%.

New_home_sales_julyThis is not how it gets reported.

I am not sure if it is a case  of innumeracy or of the media wouldn't have a story about New Home Sales otherwise. As the Commerce Department itself reported in the footnotes, Friday's New Home Sales were statistically meaningless.

Even the nearby chart  has the illusion of precision

Existing Home sales were out today, and may come in for the same treatment later this weekend.

Note: This is before we even factor in the cancellation factor after the jump:
>

UPDATE August 27, 2007 2:21pm

I see that Northern Trust's Paul Kasriel comments:

Gain in New Home Sales Is Inconsistent with Reports from Home Builders

Today’s report that suggests a recovery in sales of new homes is not anywhere close. At the same time, the increase in sales and price are suspect because the financial press has a number of stories everyday about home builders reporting significant declines in sales and earnings, a plethora of incentives to move sales, cancellations of contracts, and so on. Cancellations of contracts to purchase homes are not reflected in this report. It is reasonable to assume that excluding cancellations leads to overestimating sales of new homes and underestimating inventories of unsold homes. Also, the home builders (see chart 4) survey for August showed the second lowest reading in the history of series. We need to see reports of future months and watch out for revisions of estimates of home sales.

New_homes_3_mo_ma


>

Sources:
NEW RESIDENTIAL SALES IN JULY 2007 (PDF)
AUGUST 24, 2007 AT 10:00 A.M. EDT
http://www.census.gov/const/newressales.pdf

How does the Census Bureau handle cancelled sales contracts?
http://www.census.gov/const/www/salescancellations.html

Gain in New Home Sales Is Inconsistent with Reports from Home Builders
Northern Trust Global Economic Research
August 24, 2007
http://tinyurl.com/2rnbcb

Note: This is before we even factor in the cancellation factor:

How does the Census Bureau handle cancelled sales contracts in the published estimates of New Home Sales?

The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts.

The Survey of Construction (SOC) is the instrument used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the "for sale" inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey. Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold.

Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice.

As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales. (emphasis added)

Monday, August 27, 2007 | 11:49 AM | Permalink | Comments (27) | TrackBack (0)
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Comments

To be fair, Barry, the vast majority of the 90% confidence interval is in positive territory here (assuming we've sampled properly in the first place, which is another story...), so I can see why most people would be calling this a gain.

Perhaps more interesting is how it's called a gain when it's simply better than the month before by a tiny margin, but staggeringly worse than the previous year? This aspect was glossed over in all of the coverage which I was unprivileged enough to see. There is a degree of logical inconsistency or outright dishonesty at work.

I think the real story is that, ultimately, until the evidence comes in as to how the unwind progresses through the next few layers of mortgages issued in the entire 04 - 06 window, and any regulatory / banking / governmental action is decided, it will be hard to call this one way or another.

But I guess "Housing: Who the knows?" doesn't make for as good of a headline to attract advertisers.

Posted by: AD | Aug 27, 2007 11:57:16 AM

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