July 26, 2013
Chad Karnes, Chief Market Strategist
New home sales are suffering their biggest price drop since 2008, but the media insists that all is okay with the housing market’s recovery because for some reason they are now focused on the volume of sales instead of sales prices.
They have shifted their focus to whatever is the more positive data point, making it much easier to label them biased.
This is the equivalent to ignoring the stock market’s price, but caring and focusing on the amount of volume traded in the markets instead. Unfortunately for the media, price is more important than volume and the same is certainly true in the housing market.
The Real Data (the stuff nobody wants you to see)
With the media cherry picking the data, no wonder there is confusion as to what is really going on in the housing market. Is it getting better or getting worse?
This headline from Reuters on 7/24 sums up their stance, “New home sales hit five year high, prices soar”.
This is extremely misleading, but they go on, “The third straight month of gains in new home sales, which are measured when contracts are signed, suggested the housing market was gaining more muscle and should allay concerns that higher mortgage rates could slow down momentum.”
WATCH: The Stock Market's Next Big Move, According to the VIX
Reuters’s article focuses on the highlighted 8.3% number in the table I created below, which indeed shows that New Single Family Home Transactions were up in June by 8.3% over May.
However, by saying, “prices soar”, they are borderline lying as home prices have actually declined significantly over the last two months.
The table below shows the actual numbers released along with the key numbers focused on by the media highlighted in yellow. It becomes pretty apparent why they failed to mention anything about monthly changes in home prices (NYSEARCA:VNQ) and chose rather to focus on the volume
A Biased Shift by the Media
Do you remember in May when the media was going gaga over median home sale price (NYSEARCA:RWR) gains?
Here is one of the many examples from the Wall Street Journal concerning April’s homes data, “New home prices hit highs as builders limit supply”.
But, 7/24’s headline from the Wall Street Journal also shifts the focus from sales prices to sales volume, “U.S. New-Home Sales surge 8.3%”, and only mentions the year over year 7.4% gain in home prices (and of course not the 12% month over month decline since April).
Reuters went so far as proclaiming, “prices soar”, which is extremely misleading. In May for instance prices were up 9.9% over last year. Now they are up just 7.4%.
The top part of the table shows this best as prices have actually declined significantly for two months now, down 12%, the largest two month drop in home sales prices since 2008.
Over the last two months the average home sale price has declined over $40,000, but of course the media fails to mention any of this because all of a sudden volume matters more than price, a complete shift from just two months ago.
What Really Matters – Leading Indicators
It is easy to throw your hands up in the air and proclaim this data is worthless, and you may be on to something if you do.
Home price data is lagging, meaning it is provided after the fact. By the time the data has been released it may not provide much value as the markets have already factored the information into price.
That is why I monitor the leading indicators that predicted this decline in home prices and homebuilder stocks.
On 5/12 in an article I authored titled, “Timber!” I warned that lumber prices were crashing and that it was likely homebuilder stocks and the housing market would follow.
The SPDR S&P Homebuilders ETF (NYSEARCA:XHB) was trading for $32.32 then. It has since fallen below $30 and is significantly underperforming the broader equities markets (NYSEARCA:VTI).
Right now lumber prices are completing a relief rally, just as they did in the summer of 2011, and just before they along with the broader market (NYSEARCA:VEA) tanked again. Back then, once that relief rally ended, homebuilder stocks (NYSEARCA:ITB) joined lumber in significant price declines.
Actual home sales prices are down 12% in only two months and it is likely only a matter of time before homebuilder stocks see similar declines.
Homebuilder share prices are already off 7% since that article called out the tanking lumber prices and many of the individual homebuilders such as KB Home (NYSE:KBH) and DR Horton (NYSE:DHI) are down significantly more . If a similar scenario is to occur as did in 2011, homebuilders could fall another 20%.
Lumber prices are behaving very similar to 2011 which led a significant decline in housing equities. Are you ready for the next big move?
The ETF Profit Strategy Newsletter uses technical analysis, market sentiment, and common sense to stay ahead of the housing market and other asset classes to keep investors on the correct side of the markets.
Follow us on Twitter @ ETFguide