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August 27, 2015 at 12:19 PM
We interrupt this crash and recovery for a brief word about the economy, in particular residential real estate and new home sales. This is an area of the economy I have been studying and writing about for decades.
New home sales were reported earlier this week; they are a component of gross domestic product (existing home sales are not). We learned this morning that second quarter GDP was revised to 3.7%. So new home sales are especially important, even though they make up less than 15% of total housing sales.
A few things you should know about this data: Month-to-month, it is a very noisy series. It is self-reported by builders, and I always have gotten the sense that they get around to doing the paperwork…eventually. Quarterly figures are more or less accurate, but each month comes with a high double- digit probability of statistical error.
I want to draw your attention to two of my favorite charts, courtesy of Bill McBride of Calculated Risk. He uses data in a way that is most informative.
The chart above is new home sales, presented as a monthly series on an annual non-seasonally adjusted basis. Each colored bar represents a different year. Looking at new home sales this way allows us to easily see the “Seasonal Homes Sales Trend.” Home buying occurs on a very specific annual cycle, rising in the spring, peaking in the summer (got to get the kids enrolled in the new district before school starts) then tailing off in the winter.
By omitting the seasonal adjustments, we get a cleaner look at the actual sales data. We also see how strong or weak any given year is. Note that for a longest time, much of the media got this wrong, misreporting month-to-month data as a recovering housing market, instead of as part of the usual annual cycle.
Let’s take a look at July: Last month — shown as a red column — had 43,000 new home sales, the highest July sales figure since 2008. In July 2014, the number was 35,000. It pales, of course, to the all time July high in 2005 — that was 117,000 — but it’s a lot more than the recent July low of 26,000 in 2010.
