Understanding Sales Statistics — Junk In, Junk Out

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If you happen to wonder on occasion how some people can be so misinformed about what's going on in the housing market, you only need look at some of what they are being fed by the media to understand that it's not entirely their fault.

Consider a recent story in a Los Angeles area daily newspaper (I have chosen not to name the publication out of mercy for the reporter and editors responsible.)

The story, which was about Los Angeles County's new home sales figures, concerned itself primarily with how the numbers were contrasted by a decrease in the sale of existing homes. An industry observer was quoted as offering the only explanation for the disparity: He said it's because builders are better deal makers than are the owners of existing homes.

Nevermind that a couple of months ago DataQuick News quoted DQ's president, Marshall Prentice, as saying:

"Builders are a bit more careful these days. They used to build tracts and put up "For Sale" signs. This time around they're building a couple of homes to show potential buyers, getting sales contracts signed with a deposit, and then building the rest of the tract. They don't want to get caught with unsold inventory like they did in the early 1990s."

In addition, the story in question made no mention of the fact that the boost in new-home sales in LA County is contrasted by dismal national sales stats for new homes. The numbers released last week by the Commerce Department were reported by many news organizations, including Reuters:

Sales of new homes plunged 10.5% in February, biggest drop in nearly nine years, while prices fell and the number of homes on the market hit a record high, the government said Friday in a report that signals significant slowing in the housing market.

The pace of new single-family home sales slowed to a 1.08 million unit annual rate in February from January's downwardly revised 1.207 million unit rate, the Commerce Department said.

"This is what the Fed wants, they want housing to slow — that is the place where they can most effect wealth creation and spending," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. "The Fed is that much closer to being done. I think they are done after next week."

The real story, of course, is the seeming anomaly that exists in Southern California. It has nothing to do with whether builders are better at making deals. Here's the answer, as explained a full week ago by the LA Times:

The reason for the difference: There has been less home building in much of Southern California, thanks largely to tight governmental regulations and a lack of available land.

"We just don't have much excess supply," (Steve) Johnson (director of the Southern California region for real estate consulting firm MetroStudy) said.

The Southland housing market also is holding up better because its economy is more diverse and job creation remains strong, thanks in part to growth in such sectors as tourism, trade and aerospace. The region also is proving to be less volatile because the presence of real estate speculators has been less than in other hot markets.

However, the Southland's February inventory of unsold homes was up 80% from a year earlier, Johnson said, suggesting that demand here was cooling nonetheless.

"Builders used to be able to take the 'Field of Dreams' approach — built it and they will come," Johnson said. "Now they have to do their homework and evaluate the market more carefully."

One thing builders are finding is that rising home prices, coupled with rising mortgage rates, are tempering the ardor of prospective buyers, experts said.

Many Southland builders are working to adjust their strategies to accommodate the more-reticent attitude of buyers.

They are building smaller homes, such as condominiums and town homes, or converting existing apartment units into for-sale housing, which are usually priced lower than single-family houses.

Builders also have scaled back the number of homes released for sale at their new-home communities. "Builders will shift their mix of products to accommodate the market," said John Karevoll, chief analyst for DataQuick.

Remember this the next time you marvel at the fathead at the cocktail party and how dim he appeared to be while spouting off about the housing market. Maybe it's his media diet.

— The Boy in the Big Housing Bubble