Lies, Damned Lies, and Statistics

Okay, let's break down this morning's economic numbers.

First up was mortgage application volume, tracked by the Mortgage Bankers' Association. Overall volume was up 7.5% in the latest week, after a 5.6% gain in the prior week. Evidence that housing demand is picking up, right?

Not so fast. First, the increase last week came even as mortgage rates rose from 5.15% to 5.24%, and were led by refinancing apps, which rose 12.7% compared with just a 1% gain in purchase apps. The nature of the refi beast is that people try to time the bottom. Anytime there's a jump in rates, you'll see these market-timers come off the sidelines in a last-gasp effort to catch rates near the bottom, as they tend to rise faster than they fall.

Second, there are still a ton of option ARM resets coming in the fourth quarter of this year and the next two years. Those people are desperate to get out of these negative-amortizing ARMs before the reset hits, so they file multiple apps with different lenders, hoping one of them will underwrite the loan. We saw this phenomenon earlier this year: many apps were filed, but not many loans were ultimately written. So we see lots of volume coming from a relatively small pool of borrowers who fill out multiple applications, none of which may result in a loan.

On to durable goods orders, which rose 4.9% in July, beating the forecast by nearly two percentage points. But most of the gain came from aircraft orders, which are volatile. Ex-transportation, orders rose, but less than forecast. And ex-aircraft, orders fell. Overall orders are still down more than 20% YOY, and the base-year data is pretty bad.

Finally, new home sales rose 9.6% in July, the most in over four years, and beat forecast by 8 percentage points. That is pretty good news, but let's examine why people are buying new homes when there are so many foreclosures on the market.

First, builders are building smaller units at a lower price point to compete with foreclosures. As evidence, the largest percentage of new homes for sale in July was in the $150-200k bracket, at 28% of the total. At the peak of the bubble in mid-2005, the largest percentage was in the $300k+ bracket, at 31%.

Why buy an 1,800 sq. ft. new home when I can buy a nearly-new foreclosure twice that size for around the same price? Two reasons. First, households are de-leveraging, and they're realizing that it costs a lot more to furnish, maintain, heat and cool a McMansion than a more reasonably-sized home. We're making do instead of splurging.

Second, many foreclosures have suffered neglect from being on the market unoccupied for a long period of time, or even damage inflicted by the outgoing homeowner or by vandals. So there may be a considerable investment required to make those homes liveable, whereas a new unit is move-in ready (and builders are still offering big incentives).

The bottom line is that, while new home sales are up of late, the months' supply - while improved since March - is still about twice normal levels, so builders will still have to be cautious for a while. Also, activity will slow as we head into the inclement weather months.

It pays to look beyond the headlines, as some of the apparent green shoots may be little more than dandelions.