New Home Sales? Who Cares?

(MoneyWatch)  Sales of new homes plunged to a record low in January. This, according to USA Today, underscores "the formidable challenges facing the housing industry as it tries to recover from the worst slump in decades."
According to the Wall Street Journal, it underscores "the fragility in the housing market."
You want to know what else it underscores? That New Homes is a terrible, increasingly irrelevant data series.

Let's get wonky. In 2009, a little over five million homes were sold -- according to the National Association of Realtors, that's 5,156,000 "existing homes." When people talk about home sales data, that's often the series they mean. Those numbers are supposedly tracked at closing.

The Census Bureau, however, has its own measure, which is the above-quoted "New Homes Sold." For the Census Bureau to count a sale, the home must be new (duh!). That means just finished or even under construction, but here's a rub -- as long as it's a spec house, built by a developer for general sale. If you're having your contractor build a house to suit you, you certainly think it's new, but they don't count it.

So in other words, New Home Sales is a good index to watch if you're investing in homebuilders. If you own Toll Brothers stock, by all means, watch it like a hawk.

The rest of the world likes this data series because the Census Bureau tracks contracts signed (or deposits exchanged). This, those of you who have bought a home know, happens in advance of closing, generally by 30 or more days. So in many ways, the Census Bureau number is regarded by housing eggheads as a leading indicator -- if contracts go down in any given month, then closings should go down a month or two later.

What they're overlooking is that it's not worth caring, because new homes aren't really a very large part of the real estate market. In fact, the new homes number has been sliding as a percentage of the existing home sales number for years.

Our focus on new homes as an important data series is a carryover from the beginning of the decade, when January 2001's seasonally adjusted annual rate of 921,000 was 17.5 percent -- now that sounds meaty -- of the eventual existing home sales of 5.25 million.

But new home sales have been sliding in relative relevance since then. The ratio of new to existing was just under ten percent in 2008, and just under 7 percent for 2009.

For those of you who want a metaphor, here goes: it's like watching the Texas League to see how the Angels are going to do, even though every year fewer and fewer of their players come up through the farm system and more and more come from trades with existing teams.

I'll be on Moneywatch tomorrow to comment on the numbers of course, but here's a preview of my message: keep your eye on the ball, which is existing home sales. And, of course, Happy Spring Training.