July 29th, 2014 3:33 PM by Nick Rapplean
Every now and again, it seems a good idea to look at just how confusing the official economic indicators can easily become, especially certain computations, like the figure for how many Newly-constructed homes have sold recently or, for that matter, how many new homes were begun last month (starts).
Let's look at just how crazy-making the data regarding new home sales has been so far this year. But, before we look at actual numbers, let's recall that new home sales in any given month are computed by the U.S. Census Bureau, which is a very large bureaucracy, and counting beans among new home sales is not phenomenally important to them. More to the point, they're clearly overworked, with overlapping areas of responsibility, and unreliable sources of information. It is not uncommon at all to have one month's figures revised before the figures for the following month arrive. Even worse, the jumps and plunges among numbers from one month to the next are rarely explained very well.
Nonetheless, they're what we have, so we give them perhaps more credence than they deserve. But, that doesn't say all that should be said. We should also suggest that any changes in New Home Sales are quite important these days.
Why? Because, we're neither building new homes nor selling them fast enough to meet current needs. We aren't constructing half as many new residential homes as were completed in an average year not long ago. As a consequence, home prices are arguably inflated, especially when we add in the shortage of buildable lots that construction firms are dealing with today.
Consequently, many in the real estate industry see new home sales as one of the leading indicators of change, quite possibly, of improving recovery in the overall real estate sector.
Thus, when the Census Bureau announced that new home sales had increased by a stunning 18.6% from April to May of this year, it generated some excitement. At last, many analysts declared. But, many others, knowing how volatile, or changeable, new home sales figures are, wisely adopted a wait-and-see attitude.
This was justified by the data for the months of June, when new home sales were reported to have fallen by a steep 8.1%.
One has to wonder, of course, how the total number of new home sales can rise by 18.6% one month, and then fall by 8.1% the next. The Census Bureau had no further light to shed on the matter, offering no judgment on how the figure jumped by 18.6%, only to fall the next month by 8.1%.
I don't pretend to be great with numbers, but I suspect we can disregard these as we try, often in vain, to make some sense of the market's direction. Let me also add that this is just one source of recent confusion among economic indicators.
Is there anything we can do to avoid the obvious confusion and, let's say it, misleading data? The best suggestion I can offer is that with numbers of major importance, it may be wise to keep a three- or four- month moving average of where the homes sales figures have been reported to land. At least this would smooth out the confusion made by spikes and plunges.
You're probably very-well-versed in using moving averages, but I think it's worth talking about their use in a coming update.