Each month we are treated to multiple reports on homes sales. Unless you happen to be a housing economist (ahem), the latest roundup of reports, covering June, might have left you seriously confused. Existing-home sales are up! New-home sales are down! Pending home sales are down—but also up! Got whiplash?
OK, it’s time to cut through the clutter and the hype. Let’s dive into the three biggest recent reports to see what they’re really telling us—and which ones really offer the insights you need to know about what’s happening in the housing market right now.
Existing-home sales
First we have the existing-home sales market, and two different metrics were used to gauge how the market looked nationally in June.
Last week, we learned about June’s existing-home sales from the National Association of Realtors®—they surpassed the peak of the 2006 housing boom. Great news, right? Housing metric lesson No. 1: Existing-home sales are really closings. The data in that report cover consummated sales of existing homes. And in that report we get readings of the volume of sales, inventory, median existing-home price trends, and useful insights into key attributes such as the share of first-time buyers.
Bottom line: We learned from the June report that this is the biggest and healthiest year for existing-home sales since 2006. Median prices set a new, though nominal, record and supply remained tight, but inventory increased for the fourth straight month to enable the higher volume of sales.
New-home sales
Then there’s the new-home sales report from the Commerce Department. This is the one that seems like a major bummer, as sales dipped from the previous month. Does that mean housing storm clouds are on the horizon? Not necessarily. Ironically, the Commerce Department is a part of the Census Bureau, but it bases stats on new-home sales from a small sample of builders—not a census! As a result, this data series needs to be taken with a bucket of saltwater, as the confidence interval, or margin of error, very often means that the monthly reading is statistically meaningless.
Housing metric lesson No. 2: New-home sales are based on new contracts. Therefore, new-home sales are a more timely view of June sales activity. But given that these contracts are on new homes, most of which need to be built, they make take months to close.
The stories covering the June new-home sales data largely ignored the tedious issue of statistical relevance. What were all the headlines about last Friday? They were all about the assumption that new-home sales reversed course, sinking 6.8% from May.
But wait—check the confidence interval. It’s plus or minus 12.5%! So what did we really learn from this report? NOTHING. Nada. Zilch.
The month-over-month trend was way outside the confidence interval. Even the year-over-year reading (which was positive at 18%) technically wasn’t statistically meaningful.
This report’s headline should have read, “We have no clue how new-home sales trended in June due to the very thin sample of builders telling us how sales were, and what we learned from our sample was so muddled that we have no idea what to tell you.”
While the new-home market is recovering, we’re still at very low volumes historically. That means the sampling methodology that might have worked in 2005 has a bit of a problem in 2015—you need large numbers for sampling to be accurate.
But is there any other useful data on new-home sales? Do new-home sales even matter?
Builder confidence, reported monthly by the National Association of Home Builders, indicates that builders have been positive all spring and throughout the summer.
The biggest builders are publicly traded and report on their performance every quarter. Surveying the latest earnings reports and calls, the only builders reporting slightly slower orders this spring also reported higher prices and margins. In other words, demand is not softening; rather, those builders are seeking higher prices and returns.
New-home sales matter deeply to the economy, because the sale of every new home affects job growth and gross domestic product. That’s why Wall Street pays close attention to new-home data, even though new homes now represent less than 10% of sales. But builders can sell only what they are willing to build, and the big builders seem happy for now with moderate growth combined with high prices and profits.
Representing 90% of the total market, existing homes are where it’s at if you want to understand the current pulse of housing.
Pending home sales
So that brings me to the third report: pending home sales, which were reported this week by the NAR.
Housing metric lesson No. 3: Pending home sales are contracts on existing homes that are signed but not closed. Pending sales come before existing-home sales (a contract precedes a closing). They also represent the most recent sales activity, like new-home sales do.
We learned from this week’s report that June’s seasonally adjusted index of pending home sales declined 1.8% from May but was still up 8% over last year.
But the nonseasonally adjusted index actually increased 2.6% in June over May.
Housing metric lesson No. 4: Pay close attention to differences in trends in seasonal versus nonseasonal data. Seasonal adjustments aim to even out monthly data that naturally have a recurring seasonal cycle. Home sales tend to be high in June and low in January, so without seasonal adjustments you couldn’t really compare those months. The technique used to make those seasonal adjustments, however, is less than perfect.
The mixed signals from seasonal to nonseasonal mean that new contracts were up in June, but not as much as the computer model thinks it should have been. In this situation, I care more about the year-over-year trend in the nonseasonally adjusted number, which was up 11% over last June.
This is a tricky time of year to assess housing trends as housing is very seasonal, and seasonal trends vary by market.
Regardless of what reading you prefer, the level of pending sales remains high. You have to go back to 2006 to see better readings on both indices.
From my vantage point, home-buying momentum remains strong, but we are now entering the time of the year when demand starts to decline as families focus on the start of the school year.
All factors that are critical for increasing sales have been evident this spring and summer. Stronger demand, driven by real growth in first-time buyers, has been driving the increases in sales over last year. Credit availability is wider, though it is just a slight improvement over last year. And while supply remains tight, we have seen growth in inventories of listings all spring and so far this summer.
So don’t fret—the housing market remains hot. Trust us. Just ignore the chatter about new homes, and beware of seasonal adjustments.
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