I Call Shenanigans on This Economic Indicator

All economic indicators are rearward-looking; that's just a fact. The data that goes into their summation is gathered from the past, and they offer only glimpses as to what to expect for the immediate future. This doesn't mean that I don't find some of these indicators to be useful. GDP, unemployment data, the monthly purchasing managers index, and the monthly U.S. trade deficit report are all valuable tools that I use to get a glimpse as to where the economy could be headed next.

And then there are the useless indicators -- the ones I wouldn't trust as far as I could throw them.

Housing, schmousing!
This week's news from the National Association of Homebuilders noted that U.S. homebuilders' sentiment rose to 25 in January, its highest level in 4.5 years. The homebuilder sentiment index takes into account the overall outlook on the housing sector based on the opinions of 466 different homebuilders.

Although this represents the highest level of optimism among homebuilders since June 2007, I'm still going to call shenanigans on this indicator.

Beyond the numbers
Rather than misconstruing "less-bad" as good, it is a step in the right direction that every month in 2011 brought year-over-year declines in foreclosure filings. Thanks to nightmarish documentation and legal problems, fewer than 1.9 million foreclosure filings were sent out in 2011. This does not, however, solve the problem that nearly 1.4 million foreclosed homes are currently sitting on the market waiting to be purchased, according to data from RealtyTrac. Offering investors and first-time buyers significant price-breaks over a new home, foreclosures are continuing to muck up housing's recovery.

It also bears noting that the index at 25 still exudes the poor conditions of the sector. A reading over 50 would indicate a good outlook while anything below that signals poor operating conditions. This is pretty consistent with the degree of growth we're getting out of the homebuilding sector. New orders at Lennar (NYS: LEN) are up 20% based on its latest quarter, Standard Pacific (NYS: SPF) reported a 42% year-over-year jump in backlog back in October, and struggling Hovnanian (NYS: HOV) even reported a 19% increase in backlog based on units -- yet only Lennar is profitable.

A quick scan of the housing sector reveals considerably more companies are losing money on a trailing-12-month basis than are making money, and even those that are making money, like Toll Brothers (NYS: TOL) , only wound up making a full-year profit thanks to the exclusion of inventory writedowns from its earnings results.

Finally, we have to remember that the housing sector has faked us out before. The worst was supposed to be over in 2009. Then 2010 was supposed to mark a bottom when the government introduced the new homebuyer tax credits and attempted to stimulate the housing sector. When that didn't work, homebuilders declared 2011 the bottom... and many still lost money. So here we are, early in 2012, and the U.S. homebuilder sentiment index is indicating that the outlook on housing is the best it has been in years. Call me not convinced.

Kick it to the curb
Unemployment rates have improved but are still historically high, the number of foreclosed homes for sale remains historically high, housing prices are just barely off their lows, and the majority of the sector is still bathing in losses. Cheer this economic indicator all you want, but I'd trust a monkey throwing darts long before I'd put my faith behind this indicator.

What's your opinion on the housing sector? Sound off in the comments section below.

If, like me, you're tired of the housing sector giving you the runaround, I invite you to download a copy of our latest special report: "3 American Companies Set to Dominate the World." Why worry about money-losing companies when our top analysts have picked out three names ready to dominate the emerging markets for you? Best of all, this report is completely free -- but only for a limited time, so don't miss out!

At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. He claims himself as part of the one-quarter of U.S. homeowners currently underwater on their mortgage. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that promises the truth, and nothing but the truth.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.