New home sales nonsense–market down 20+ percent

Today’s “breaking news” that new home sales are up more than they have been in eight years is yet another case of journalists who don’t understand numbers. This has become a common occurrence now with each new batch of numbers released by the Commerce Department. If you’re trying to make business decisions based on these reports, you’re in for a big surprise. Even the Wall Street Journal and CNN Money ape this nonsense.

The problem is that the numbers they’re citing compare month-to-month totals. But month-to-month comparisons are useless in anything construction or housing related. Good weather, bad weather, restrictive zoning and code changes, layoffs from major employers, gas prices, even traffic jams can throw off the short term numbers.

What you want to look for is this month compared to the same month last year. And as blogger Barry Ritholtz points out, June 2009 new home sales are down 21.3 percent from June 2008–a far cry from the false optimism of today’s headlines. Even better is to compare the last three months with the same period last year. That levels out a lot of the weather-related differences and other idiosyncrasies. Check the margin of error too. If it’s larger than the increase/decrease, then the sales number is statistically meaningless. The Commerce Department issues revised numbers after several months and these have a much lower margin of error and hence are much more accurate. But these rarely make the headlines.