The US has a penchant for presenting data in seasonally adjusted annual rates. If monthly and quarterly data are annualized, naturally they appear bigger. I am not suggesting that it is done with a view to “manipulate” markets. Goals are more subtle and are part of the ingrained processes and habits of appearing “bigger” than one really is.
On 26 February, the US census bureau (part of the US department of commerce) released the “seasonally adjusted annual rate” of sale of new homes in the US. This piece of data is also called “new home sales”. On a seasonally adjusted basis, sale of new homes rose 9.6% in January from December—a big number for a month-on-month change. The annual change from January 2013 was a rather modest 2.1%.
This piece of data—sale of new homes in January—is at odds with the confidence plunge seen in the monthly data on the Housing Market Index (HMI). HMI measures confidence among homebuilders. It is published every month by the National Association of Home Builders (NAHB). It plunged from 56 in January to 46 in February.
Cold weather—spate of severe snow storms, arctic freeze, etc.,—is claimed to have affected their confidence. That does not sound very persuasive. If the traffic of homebuyers is good—that is, those who wish to or enter into contracts to buy new homes—then homebuilders should not lose their confidence because of bad weather.
The press release put out by NAHB on the February collapse in HMI has some interesting statements. They are interesting because they contradict the actual data and the big jump we have seen in the sale of new homes.
“Significant weather conditions across most of the country led to a decline in buyer traffic last month,” said NAHB chairman Kevin Kelly, a home builder and developer from Wilmington, Delaware...“Clearly, constraints on the supply chain for building materials, developed lots and skilled workers are making builders worry,” said NAHB chief economist David Crowe.
Note the first sentence. It is about weather conditions affecting current demand. Frankly, that should not make homebuilders worry too much about the future. Then, there is the shortage of material and labour. That is a relatively happy problem to have. This suggests that they are not concerned about the demand for homes. They appear only concerned about how to meet the demand. But when we examine the data, they seem to be genuinely worried about demand.
• The actual data on HMI shows that their confidence in the traffic of prospective buyers has dropped sharply. The sub-index on the “traffic of prospective buyers” has dropped to 31. It is lower than the value seen in February 2013.
• Data on “sale of new homes” reflected neither of these two concerns on the part of homebuilders. One, the data showed no weather impact. It jumped 9.6% month-on-month. Seasonal adjustment has scrubbed off all snow from the data. Two, it does not show much decline in the sale of prospective homes either, because sale of new homes is counted as soon as the contract is signed. If sale of new homes is brisk due to buyers signing contracts for building new homes, then homebuilders should not be too gloomy.
Which data is correct? There is a cross-check available. We can turn to the Mortgage Bankers’ Association (MBA) data. In their monthly release on the applications for new mortgages, they had this to say:
The Market Composite Index, a measure of mortgage loan application volume, decreased 8.5% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the index decreased 7% compared with the previous week... “Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pick-up in purchase activity, and we are not yet seeing it,” said Mike Fratantoni, MBA’s chief economist. (Source: http://bit.ly/1gMCJZ0)
So, it appears that the sale of new homes data—after seasonal adjustment—is an aberration. If this trend continues, we should expect Janet Yellen, the new chairperson of the Federal Reserve board, to go easy on tapering, to extend forward guidance and to try out more unorthodox measures (nominal GDP targeting?). This extract from the recently released transcripts of the Federal Open Market Committee meetings in 2008 shows her to be aggressive in wanting to stimulate the economy aggressively and unambiguously when signs of weakness appear. These extracts suggest that she is likely to be far more dovish than either of her two immediate predecessors.
That won’t be good news for the US dollar when her dovish instincts find policy expression. Well, it won’t be good for European economies either, or, for that matter, the rest of the world when America exports its deflation to it. Emerging economies will have a problem of plenty (capital flows) again. The roller coaster ride will continue for the rest of the world thanks to America’s policy experiments.
V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at firstname.lastname@example.org. To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk-