Home Sales Data: Lots of Huffing and Puffing

Here we go again.

Tuesday's new-home sales data of plus 13% month over month was ... how shall I politely phrase this ... somewhat questionable.

It seemed like such an outlier that I had to dig into the details of the report, which came from the U.S. Census Bureau and the Department of Housing and Urban Development, especially given all the other nonconfirming data we have seen. We also learned Tuesday that unsold house inventory is at its highest since April 1986. (Note that the existing-homes number is about six times the actual number of new homes.)

Other data are similar: MBA mortgage applications were soft, NAHB/Wells Fargo notes that new sales have been cooling, and the Housing Market Index (HMI) is less than robust. The Wall Street Journal quoted Banc of America Securities analyst Daniel Oppenheim as saying the report "appears to be an aberration." His firm's survey of homebuilders shows that demand has been cooling.

So too says the National Association of Home Builders' chief economist, Dave Seiders, who termed the latest sales data "bizarre." He said his group's recent surveys indicate that sales generally have been slowing.

All these anomalies caused me to tear apart the Census Bureau's data and its methodology (along with the assistance of the very able statisticians at Census). I discovered three items worth mentioning:

1. The data appear to be "statistically insignificant," according to the Census Bureau.
2. Strong historical numbers (like plus 13%) tend to be subject to revision but mostly stay net positive, albeit somewhat moderated.
3. Over the past 15 years, double-digit months have generally been followed by flat to negative data the next month (mean reversion).

Let's take each of these in order. To do so, we need to go to the actual data, which can be found here.

The first item is the margin of error: It's actually higher than the increase for October as well as the revision for September.

"Sales of new one-family houses in October of 2005 were at a seasonally adjusted annual rate of 1,424,000. ... This is 13% (+/- 17.7%)* above the revised September rate of 1,260,000 and 9.0% (+/- 18.2%)* above the October estimate."

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.