Why Monday's housing numbers are meaningless

Early Monday morning, the Census Bureau announced that new home sales surged 11 percent in June compared with a month earlier [pdf], outpacing most economists' estimates and leading to a orgy of enthusiastic news coverage. But did sales really climb?

The press certainly thinks so. Bloomberg News reported that the data provide "evidence that the deepest housing slump since the Great Depression is starting to stabilize," while the Associated Press said it was "another sign the housing market is finally bouncing back from the worst downturn in decades." And so on.

Unfortunately, it's not that simple.
Why not? Because the government's numbers are not necessarily reliable. The Census Bureau says so itself. It "does not have sufficient statistical evidence to conclude that the actual change is different from zero," it said in today's report.

In other words, maybe that 11 percent gain in new home sales never really existed.

Here's how that could happen: The government doesn't tally up every new home sold each month; instead, the data comes from a survey. And surveys aren't perfect. In fact, the Census Bureau's survey of new home sales is so imperfect that the comparison of May's data to June's has a sampling error of plus or minus 13.4 percent.

That means that sales could have actually fallen by more than two percent over that period. Or they could jumped as much as 23 percent. Or they might not have changed at all. (A Census spokeswoman didn't immediately return a call seeking the bureau's comment.)

Economists know it's unwise to put too much stock in these monthly numbers. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, calls it "irresponsible" to tout data like today's housing figure as a sign of a turnaround without putting it in its proper context.

"The monthly data is always going to be erratic and it's irresponsible to jump on it," said Baker in an interview, whose blog, Beat the Press, focuses on business media criticism. "It's always best when we can put it in a two- or three-month pattern."

"We want to have some immediacy," he added. "This is the new data, so we want to be able to say we know more about the economy today than before we got it, but we have to be pretty tentative."

Certainly, there was plenty of bad news in today's report any way you look at it. Maybe new home sales grew from May to June, but they were certainly lower last month than they were at the same time last year. (Yes, that drop was outside the margin of error.) And prices fell sharply, too. That suggests that housing hasn't hit bottom yet -- even if things are getting better in some respects.

And breathless headlines not withstanding, there are a few signs that they are. Pat Newport, an economist with research firm IHS Global Insight, said the long-term trend for home sales is pointing upward. But in a note to clients this morning, he emphasized that it's important to take a broad view because the newly released figures were "extremely noisy."

"That's why the stock market doesn't react too much," said Newport in an interview. Indeed, the S&P 500 bounced just four points, or 0.41 percent, when the data was released around 10 a.m. "Smart people can see that the specific numbers aren't significant, even if the overall trend is improving over time."
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