Kass: New-Home Sales on Weak Foundation

This blog post originally appeared on RealMoney Silver on Jan. 26 at 12:15 p.m. EST.

We are in a market that appears to interpret every statistic positively.

Case in point -- today's housing report, which appears to have been the proximate cause for the upside move in the indices this morning.

Sometimes, such as in this morning's December new-home sales report, the positive interpretation is nothing more than a sound bite from a bullish cabal that incorporates little analysis and overstates the case that a broader based housing recovery is in place.

December new-home sales rose to 329,000, easily beating expectations of 300,000 and compared to 280,000 in November. But the bulk of the rise was in the Western region, increasing by an outsized 71%. By contrast, sales only increased modestly in the South and Midwest. The Northeast's sales actually declined!

During the last few months, the West Coast (California) numbers artificially inflated the national and state housing statistics, owing to the California first-time homebuyer tax credit (Assembly Bill 183), which expired on Dec. 31, 2010 (well after the national credit expired). This California home credit could be used regardless of income and was worth up to 5% of the home's price or $10,000, whichever was less.

I haven't heard a single person in the media or elsewhere focus on the notion that December's new-home sales were inflated by the expiration of the California tax credit.

No one!

This credit likely positively affected September to December new-home sales activity and prices. Since December was the last month of the state tax credit, it probably had a particularly outsized impact on today's sales report.

For example, if you go back to Case-Shiller's October report, home prices in San Francisco, San Diego and L.A. rose by about 3%, though the total country (20-city composite) reported a 0.8% drop in home prices.

But the skew in new- and existing-home sales is even more pronounced (than prices) by the California tax credit.

For example, California single-family new-home sales rose by nearly 40% in November, as nationwide new-home sales increased by only 5%. (The Northeast dropped by 27% that month!) During the same period, existing-home sales in the West rose by 13%, even though the national activity was flat.

Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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