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Why New Home Sales Data Doesn't Tell Us Much About The Real Estate Market

October's New Homes Sales report showed a modest month-over-month improvement from September.  

Before we interpret that to mean that the housing market is rebounding, though, let's consider the fallibility of the New Home Sales report. 

On the Census Bureau's Web site, there is a disclaimer about the validity of the data.  Paraphrased, it reads:

A new housing unit is considered sold when a contract is signed and/or earnest money is exchanged.  There is no follow up to verify if the sale was closed, or canceled. 

Therefore, if cancellations are high, the New Homes Sales data can be overestimated.

Couple that with the 35-45% cancellation rates as reported by builders and you start to get the picture.

However!  The disclaimer also includes the following text (again, paraphrased):

A housing unit will never be counted twice so if a previously canceled unit is later sold again, the Census Bureau does not count this sale a second time. 

Therefore, when demand is strong, New Home Sales can be underestimated.

In other words, the New Homes Sales report overestimates sales figures in a weak market, and underestimates them in a strong market.

The long-term impact of October's New Homes Sales report is unclear.  The only thing that is clear is that the monthly New Homes Sales report doesn't tell us a whole lot.