Thursday, December 24, 2009

Home Sales Data Virtually Worthless for Investors

The data on new and existing home sales these days is so flawed the numbers are virtually worthless. I literally am laughing at how out of touch the reported data really is---and why.

Of course, this is all intentional. It's better for industries and the government to report good news than bad so anything that can be done to make Joan Rivers look like Megan Fox must be done so people can keep their jobs and make money without the annoyance of actually doing anything productive or useful.

If you want to know how silly these statistics have become just look at the November 2009 numbers.

The U.S. Census Bureau reported that new homes sales fell 11.3% in November over the previous month

At the same time the National Association of Realtors ("NAR") reported that existing home sales rose 7.4% in the same month.


Are we to believe that home buyers preferred existing homes over new ones by a spread of nearly 20% of all home sales?

The basic reason the existing home sales figure looks so good is that foreclosure and short sales are counted in the existing home sales figures as "sales" compiled by the NAR.

These represent a full one-third (33%!!!) of all existing home sales. Factor these forced sales out of the statistic and what do you have?

Still declining sales volume, just like the new home sales numbers suggest.

So why not include forced sales as part of the existing sales data? For one obvious reason.

Forced sales are not voluntary sales. How can you judge home buyer and investor sentiment when a third of all sales are, so to speak, conducted with a gun at the seller's head?

A simple illustration demonstrates this point, reductio ad absurdum. Say all homes in the United States went into foreclosure tomorrow. In ninety days when all these properties started hitting the courthouse steps the NAR would report a massive, even astronomical, increase in existing home sales, just like they did when reporting the November 2009 numbers. ("A 44% increase over last years' sales! WOW!") But would this stratospheric jump in existing home sales REALLY be a good sign for the U.S. residential real estate market? Think about it. If all the homes in your town were in foreclosure would your local economy be doing great? So imagine all the homes in the United States the same way.

All the new and existing home sales numbers are also saddled with the economic distortion of the Obama tax credits for home buyers which merely shift sales from one quarter to the next. Look at the "Cash for Clunkers" fiasco if you want recent empirical evidence from the Obama Administration. The artificial and temporary stimulus of tax credits for buying a home, any home, will end and with it many of these sales. So you can't measure a trend when the stats are juiced from one month or quarter to the next.

The new and existing home sales figures being reported are just about worthless for investors. I read them and discount them faster than an Olympic sprinter on a amphetamine high.

What I see with my own eyes in my hometown of Seattle and hear with my own ears from other investors all around the United States on a daily basis are my guiding forces. The U.S. residential real estate market is weak and still has not found a bottom. Yes, there are pockets of strength due to microeconomic and local factors which the mainstream media will certainly highlight to prove the Moses-like wisdom of President Obama and his Seven Dwarfs and the genius of his economic program.

But in reality, I see MASSIVE, and I mean MASSIVE in 500 point type, hidden inventories of properties waiting to hit the market. I see desperate owners who wanted to flip and are now landlords eager to leave the business the moment the market rises. I see YEARS and YEARS of excess inventory still lingering, still haunting this market like Michael Myers in the HALLOWEEN movies. Just when you think he's dead and gone, sorry.

Read the home sales data. Then feel free to ignore them. Or better still realize if you run out of toilet paper you have an alternative.

Robert J. Abalos, Esq.