How to Understand the Housing Data
So many numbers are released so frequently. But what do they mean?
Due to its peculiar and excessive smoothing methodology, the housing Case Shiller is always behind the curve. It uses a three-month average of sale prices closed in the three months up to the last reported month, in this case December, January, and February. That means that the data represents the average price of contracts closed over a three-month period with a time midpoint of mid-November. Therefore the Case Shiller data represents the market more than five months ago.
This would be like today's Wall Street Journal reporting the Dow Jones Industrial Average 65-day moving average as of November 16. This is totally worthless data, yet the media continues to report it as if it means something.
The Federal Housing Finance Agency (FHFA) monthly price index is not quite as slow. It uses sales only from the last available month, which in this case is February. It at least recognized that a turn took place for sales closed in February.
The Commerce Department released its new home sales data. On one hand, it is relatively useless since it uses a tiny sample survey that gets revised every month for five months until the sample size is statistically significant. On the other hand, it does have certain advantages, and the revisions have not been so large that they change the absolute direction of the index.
The new home sales price data, while more volatile than the ultrasmooth and useless Case Shiller, uses contract prices from the previous month, not closed sales from two, three, or four months ago that went under contract two months before that. It is the most current index of actual contract selling prices, released with a lag of just a month. Trends can be isolated by deriving year to year changes. Median and average annual price changes in new home sales have shown consecutive steep increases in both the February and March data.
New house median sales prices were up 6.3% year over year in March. That was the second straight year-over-year increase. The new house average sale price was up 11.7%, also the second straight increase. Average price is skewed by product mix. The market isn't up 11.7%, but it's the direction and consistency of the data that's important.
The National Association of Realtors, or NARs, data for March showed its second straight monthly increase, at +5.7% for the month, with a year over year increase of +2.5%. And now the FHFA shows a slight year to year increase for sales closed in February mostly contracted in December, the weakest month of the year.
Current, real-time national listing price indexes (Housingtracker.net) have shown excellent predictive value in reflecting in real time the direction of the lagging closed sale data. They have shown year to year increases since December and are up 3.7% year to year through this week. In March, at the time corresponding with the March new home sales contract data, they were also up 3.6%. In January, at the time corresponding with the NARs March closed sales data (on average, January contracts) they were up 2.9%. The NARs corresponding closed sales data showed an increase of 2.5%. A wide variety of data is consistent in showing year to year increases in prices for the first time without the benefit of tax giveaways, or pending increases in FHA fees.
Actual, not seasonally fudged, builder new-house inventory was revised down for each month from November to February. At 144,000 units, builder inventory is now at its lowest point in 50 years. That is not a typo. Five-oh. The records only go back to 1963.
Furthermore, existing inventory is being made obsolete at a breakneck pace as the so-called "shadow inventory" removes houses from the market through locational, physical, and functional obsolescence faster than they can be placed on the market.
The new home sales actual inventory to sales ratio at 4.5 is the lowest since August 2005. Demand is historically weak, but supply is now aligned with that fact. An uneasy equilibrium has been reached.
Completed units in inventory were revised down three of the last four months. At 48,000, completed unit inventory has never been even remotely close to being this low.
Not-seasonally-adjusted actual monthly sales were revised up for all months November to February. That is the first time I've seen that in seven years of watching this data closely. Sales are still extremely weak, but tight supply and historically low interest rates may re-ignite inflation. Shiller says that housing will stay depressed for a generation. I'd fade him. If anything, in my opinion, prices will surprise to the upside much sooner than anyone thinks.
Editor's Note: Lee Adler is a financial markets analyst based in Florida. The unedited version of this article originally appeared on his website, The Wall Street Examiner.Twitter: @Lee_Adler
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