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Tuesday, July 26, 2011

Attack of the Error Bars

I was looking at the New Home Sales report, and all I have to report is that there's nothing to report. You know why? All the monthly numbers are so far inside the 90% confidence interval that reporting them is misleading at best.

On the month over month, the reported national change was 1%, absolute value. I'm not going to tell you whether that was negative or positive, because the 90% confidence interval is +/- 12.5%, so 1% either way means "we haven't the foggiest".

Turning to the monthly year over year stats, we find ourselves in pretty much the same position. The national change was 1.6%, absolute value. The sign means nothing because the 90% confidence interval is +/- 14.1%. In short, we don't know. The only YoY stat that means something is for the northeastern region, in which June sales fell 51.5% over the year. However that is misleading unless you know that the 90% confidence interval is +/- 25%, i.e, don't be too impressed. A rather small change could take that number outside the interval.

Turning then to the YTD YoY stats, we note that we are still negative, but not acutely so. Nationally we are down 11.9%, with a 90% confidence interval of 4.8%. So moderately negative, but not hugely so and it's a good guess that this is flattening out.

In short, my conclusion is that we are bouncing along the bottom, and I do expect some small improvement next year. It is historically significant, however, that sales have reached such low rates (to the point that we cannot tell whether they are rising or falling):

The basis for my forecast for improvement next year is that sales really cannot get any worse, and that historically after five years you do see slow improvement! Throwing any more federal money into a market this bad is pointless - we have wasted the money spent so far and we might as well just let time fix it. It will be cheaper and more effective.

I now conclude this epistemological rant. This report does not matter. It will not matter this year.

Fannie Mae Downgrades Housing:

bits and link below:

"Ultimately, employment remains the key to the outlook for the economy and the housing market. If the tentative labor market recovery falters amid signs of a slowdown in consumer demand, it could jeopardize the projected moderate rebound in home sales later this year. Continued deterioration in home prices, tight lending standards, and households' desire to reduce their debt loads much further are among the main risks to the housing market and the overall economy."

The report also points to the vulnerability of the banking sector to mortgage-related risk. Recently the Federal Reserve began to auction off low-quality mortgage-related assets associated with its take-over of AIG. The auctions did not go well and severely disrupted the private label market and caused market participants to mark down asset values on banks' balance sheets. The program has been suspended.

Ron - the entire housing market has little to do with new homes at this time, although historically the new home market has been an employment mover.

Employment and real incomes of the population after taxes will determine the fate of the entire housing market.

What Congress decides to do fiscally is thus going to outweigh everything else. Also energy policy is crucially important. Currently the US economy has a fatal flaw, and it is a failure to exploit our reliable and efficient energy sources in favor of adopting unbelievably expensive and unreliable energy sources.

Germany's economy will be taken down by their energy policy if they do not change it. Let it be the warning to us.
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