New Homes Sales: Mostly Noise, Little Signal

Last month, when new home sales fell 33%, I warned investors that “This data series is notoriously noisy, and you are must better off using a 3 month moving average than reading too much into any single month.”

This month, we see that New Home sales jumped 24%. The same caveat applies: Ignore the swings, look at the moving average to smooth out the volatility.

In fact, the series is so noisy that way back in 2005, we had to to a study to figure out what to make of it. Our conclusion?

“Looking back over the past 15 years of data, we see that a mean regression has followed nearly all double digit monthly gains. The subsequent month’s data was significantly lowered — flat to negative in nearly every case.”

I have yet to do study on the negative double digit months, but I have a suspicion it would be the same. Bottom line: Anytime you see a big gain or drop in this data series, you should expect a reversal the following month.

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click for larger chart

Courtesy of Calculated Risk

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Previously:
New Home Sales Data: Don’t rely On It Either (November 30th, 2005)

New Home Sales Plunge 33% (June 23rd, 2010)

Source:
NEW RESIDENTIAL SALES IN June 2010
U.S. Department of Commerce, Manufacturing and Construction Division APRIL 23, 2010 AT 10:00 A.M. EDT
Erica Filipek or Stephen Cooper
http://www.census.gov/const/newressales.pdf

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