New Home Data Still Confound but Really Don't Matter Now

 

NEW YORK (TheStreet) -- Let's be honest: If data from the housing market isn't confusing you right now, you're not paying close attention.

Fortunately, it matters less than you might think -- and will help stock investors more than they might realize.

Monday's modestly-disappointing report on new home sales for July is just the latest example. The Commerce Departmennt said single-family home sold at a seasonally adjusted annual clip of 412,000, down 2.4% from last month's estimate -- which the agency revised upward today. The data also missed the consensus forecast by about 18,000 units a year -- very broadly, 1,500 homes a month.

On the surface, it's another mixed indicator in an economy still trying to find its full stride. But there are a few reasons why  it matters less than you may think.

The economy is generating enough jobs without housing.

Most people's top economic indicator is jobs -- and even without construction in top form, job growth is more consistent than it has been in 20 years. The economy has generated 200,000 or more jobs every month since January thanks to growth in construction employment.

This sets things up for broader economic confidence to make housing pick up soon enough. It would have been nice if housing had led this year's economy, as a lot of pundits (this one included) once expected, but increasingly it's not necessary. A market selling 50% more new homes would create about another million jobs or so -- different economists assume three to five jobs per housing start, depending on whether they count jobs at home-improvement stores and other spillover effects. That would help a lot, but momentum in manufacturing and services means it's not necessary that it happen rapidly.

Soft housing markets mean low interest rates.

Critics may argue that the Federal Reserve is fighting the last war and ignoring inflation dangers, but speeches from Janet Yellen and other officials make clear that supporting the housing market is still a major goal. 

So is promoting wage growth. Economists have pointed out that construction is a big source of middle-wage jobs that can buoy the earnings of moderately-skilled workers whose incomes plunged after 2007. Promoting those goals means keeping rates lower, longer. Oddly, we are in a place where a weaker housing sector in a modestly-accelerated economy.

The margins of error in new-home data are really large.

New-home data is very volatile, in part because they are based on a survey of county building officials across the nation. Nationally, the change in new-home sales from last month isn't statistically significant because the 12.3% margin of error is greater than the 2.4% reported decline in home sales. The Commerce Department needs a bigger sample of local officials to produce data where the margin of error comes closer to the accuracy of the jobs report or even (heh, heh) political polls, which usually have margins of error of three to five percentage points in each direction.

Builders aren't panicking.

As builders reported second-quarter profits, none sounded any major alarms. Ryland Group (RYL) said sales in the west region (the weak spot in today's report) rose 38% in the second quarter. Pulte Group (PHM)  said the "U.S. housing market ... remains on a steady recovery path," and market leader D.R. Horton (DHI) said "demand for new homes is relatively stable."

Builders' results weren't great, and some shares got punished, but the commentary from management suggests the issue is more one of timing (and in some cases, particular companies' strategies) than it is about the economy. Even in the last month, the picture has gotten better than it was.

So yes, today's housing number is a disappointment. But only a minor one in an otherwise improving picture.

TheStreet Ratings team rates RYLAND GROUP INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate RYLAND GROUP INC (RYL) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, attractive valuation levels and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.4%. Since the same quarter one year prior, revenues rose by 17.1%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to -$81.44 million or 44.14% when compared to the same quarter last year. Despite an increase in cash flow of 44.14%, RYLAND GROUP INC is still growing at a significantly lower rate than the industry average of 256.79%.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Household Durables industry. The net income has significantly decreased by 86.1% when compared to the same quarter one year ago, falling from $231.19 million to $32.04 million.
  • The debt-to-equity ratio of 1.48 is relatively high when compared with the industry average, suggesting a need for better debt level management.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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