Don't be distracted by redundant information

25 Aug 2010 by Jim Fickett.

There is some difference in goals between news sources, which are always desperate for good headlines, and investors, who need substantial new information. This becomes an issue when several different data series provide highly redundant information. The new home market provides a useful example.

The housing market is in a deep funk, and we are being told so emphatically and often. Today the Census Bureau released the new home sales number for July and the Los Angeles Times reported,

Sales of new homes unexpectedly sank 12.4% in July to the lowest point since government records starting being kept in 1963. It underscored continued weakness in the housing market, which tanked after the expiration this spring of a tax break for home buyers who were already facing a stagnant job market. …

igniting fresh concerns over the state of the economic recovery

(Unexpectedly? Did they miss the news yesterday that existing home sales fell off a cliff?)

There is considerable overlap between the new home and the existing home markets – both are in trouble, in part, because there are far too many homes, and high foreclosure rates are driving down prices. But even within the sector of new homes alone there is considerable redundant news. The following are the data series that are most consistently reported:

  • The National Association of Home Builders publishes a sentiment index entitled the NAHB-Wells Fargo Housing Market Index (HMI).
  • Census publishes several series on construction spending, including “Value of Private Residential Construction Put in Place excluding rental, vacant, and seasonal residential improvements - Seasonally Adjusted Annual Rate (Millions of dollars)”.
  • Census provides several series on new home sales, including “Houses sold … Number of housing units in thousands .. Seasonally adjusted annual rate”.
  • Census also provides permits and starts, again in thousands of units, at a seasonally adjusted annual rate.

Obviously, if foreclosures are up and buying is down, these will all look bad together. Here is a graph, through June, of homebuilder sentiment (HMI), private residential construction, and new home permits, starts, and sales:

To the extent that reports draw only very general conclusions, like “continued weakness in the housing market”, or “igniting fresh concerns over the state of the economic recovery”, these series are all synonymous. Two lessons follow:

  1. Don't waste time reading reports on closely related data series except in areas where you really need the details
  2. Try not to be unduly influenced by what is really repetition of the same information

I'm not saying that there is no separate value in these five data series. Construction spending is what matters most to the economy, and it is good news that it alone, among these five, has regained its (nominal) level from the mid-90's (in part because it includes remodeling and renovation as well as new construction). The sentiment index is the least substantial, in some sense, but very timely – the August data point is already out, while construction spending is only available through June, and the others through July.

But there are only so many hours in the day. If we are near a turning point (not yet), or you are considering buying stock in Toll Brothers, or starting a home remodeling business, then by all means look at the details of all of these and more. But if you just want to know how the new home market is faring, choose one and ignore the rest.