Relying on data without understanding the methodology can lead to wrong conclusions. For example, the Census Bureau is reporting that new-home sales are only down 6 percent from one year ago, which we know is incorrect. For accurate new-home sales estimates, see the press releases of publicly traded home builders — all of whom are reporting sales (orders) that are down 20 percent-40 percent from one year ago.

Relying on data without understanding the methodology can lead to wrong conclusions. For example, the Census Bureau is reporting that new-home sales are only down 6 percent from one year ago, which we know is incorrect. For accurate new-home sales estimates, see the press releases of publicly traded home builders — all of whom are reporting sales (orders) that are down 20 percent-40 percent from one year ago.

The NAHB Housing Market Index, as well as almost every industry source we contact each month, supports the fact that sales are down 20-plus percent from one year ago in more than 70 percent of the markets we track (Texas, the Carolinas, Georgia and New Mexico are some of the major exceptions).

Our grading system of the economy and the housing market is a “bell curve” model, with statistics at an all-time high receiving an “A,” statistics near the long-term average receiving a “C,” and the worst times ever receiving an “F.” In this grading system, it is OK to be a “C” student.

Here is our current report card:

Economic Growth: C

The economy is on solid ground, which gives the Fed the confidence it needs to continue raising rates to fight inflation. Revisions show that GDP increased at an annual rate of 5.3 percent through the first quarter of 2006, which is higher than previously thought. Job growth improved slightly in May, adding 1.9 million jobs to the economy over the previous year, but is down from 2 million-plus growth in February and March. Retail sales increased 6.6 percent over the previous year. Inflation rose slightly to 2.3 percent after remaining flat at 2.1 percent for three months. Personal income growth improved slightly to 5.4 percent, and remains below its historical average of 7.4 percent.

Leading Indicators: C-

The leading indicator index declined to 2.9 percent on an annualized basis over the last six months, down from the previous month’s value of 3.9 percent. Each of the four stock market indices that we track posted losses in May, and saw their 12-month gains cut in half from April. Builder stock prices, as measured by the S&P Super Homebuilding Index, are declining, with the index showing a 24 percent decline over the last year.

Mortgage Rates: B

At month’s end, fixed rates had increased to 6.62 percent, while adjustable rates declined to 5.61 percent, widening the spread between the two. The Fed funds rate rose to 5 percent, with another increase widely expected at the next Fed meeting. The percentage of loans with an adjustable rate rose to 30.7 percent in May.

Consumer Behavior: C+

Consumer confidence slid in May, dropping to 103.2, which is still above historical averages. The biggest decline was felt in New England, where the regional index fell 27.5 points to a rating of 75. The Consumer Sentiment Index and Consumer Comfort Index decreased during the month and remain below their historical averages.

Existing-Home Market: B

Existing-home sales fell to 6.76 million in April, with decreases in all four geographic regions. The median existing-home price rose to $223,000. The inventory of existing homes increased to 6 months, which is its highest value since February 1998, and the volume of existing inventory reached 3.38 million homes. The pending home sales index declined in April to 111.8, just above its historical average.

New-Home Market: C+

The Housing Market Index (HMI) continues its downward slide, reaching 45 in May, and lending further credence to a softening market. Annualized new-home sales increased in April to 1.2 million units. Sales per the Census Bureau are down nearly 6 percent from one year ago, which appears very incorrect as almost all publicly traded builders have reported orders down 20 percent-40 percent and the HMI (a measure of sales and traffic) is also down 40 percent. The median new-home price rose to $238,500, while appreciation decelerates. According to the Census Bureau, the supply of unsold homes decreased to 5.8 months, and the months supply of standing inventory increased to 1.3 months. New-home sales are worse than reported by the Census Bureau partially because the Census Bureau methodology was not set up to account for cancellations.

Housing Supply: C+

Annualized housing starts fell to 1.85 million in April, which is down 11 percent from one year ago. Single-family starts fell 9 percent for the month to 1.53 million. Single-family permits fell 4 percent from March to 1.5 million, and total permits fell to 1.98 million.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. He can be reached at jbrec@realestateconsulting.com.

***

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