Behind Case-Shiller: What Matters More? Home Sales or Home Prices?

(MoneyWatch) 
There's no other way to cut it: home prices are falling. But that doesn't mean that there aren't buyers in the market: young couples are scrambling in areas to get bargain-priced foreclosed homes. The question is: which matters more?

Normally, home sales matter a lot more than home prices. But when the housing market is in the kind of turmoil that it is these days, home sales at cents on the dollar of what they were previously are no longer that economically significant, argue many.

Reuters' Felix Salmon makes a similar point:

And what of stories announcing a "new frenzy" of house-buying in Phoenix, poster-city for the housing bubble? I think this could be a sign of a real two-way market developing, with the number of buyers approaching the number of sellers. That's good for price transparency, but it doesn't tell us anything about the future direction of house prices: liquid markets can fall just as easily as they can rise. And, in this case, probably will.

The key problem with that argument -- and the reason it's probably best to ignore the recent Case-Shiller index, which monitors how fast home prices are falling -- is that the figure fails to represent the numerous ancillary benefits of rising home sales.

For example, construction supplier Caterpillar is much more concerned about rising sales than it is rising prices, because when people are buying more houses, they're more likely to use Caterpillar's products. The same is even true for steelmakers such as Nucor: prices are pretty insignificant unless they start preventing construction activity and property sales.

Indeed, if you're wondering why these companies' stocks are doing pretty well in a housing slump, then that's the reason. For example, while house prices fell in April, building material and garden equipment sales rose. And that was despite a weaker retail sales result overall.

It's best off discarding the Case-Shiller index as a pretty useless measure of economic growth right now, and focusing on the sales data, which directly affects GDP. That will give you a clear picture of economic growth.