by Calculated Risk on 5/30/2008 11:21:00 AM

Barry Ritholtz discusses the impact of revisions and cancellations with regards to the New Home sales report: April New Home Sales - Revisited. I'll have more on revisions, but I'll try to clear up cancellations first. Barry writes:

Cancellations: Of course, none of the new home sales data includes cancellations, which were running north of 30% -- and with the recently tightened credit, it may be even worse.

Yes. New home sales data doesn't include cancellations, and cancellations were probably just over 30% in Q1 2008 (based on my survey of public builder reports), but ...

Cancellations are not getting worse. In fact they are getting better. For most builders, cancellation rates peaked in Q3 2007 (with the credit crunch) and have improved significantly since then. And it's the change in cancellation rates that matter when analyzing the New Home data.

This is a key point: right now the Census Bureau is probably underestimating sales!

Here is how the Census Bureau handles cancellations:

The Census Bureau does not make adjustments to the new home sales figures to account for cancellations of sales contracts. The Survey of Construction (SOC) is the instrument used to collect all data on housing starts, completions, and sales. This survey usually begins by sampling a building permit authorization, which is then tracked to find out when the housing unit starts, completes, and sells. When the owner or builder of a housing unit authorized by a permit is interviewed, one of the questions asked is whether the house is being built for sale. If it is, we then ask if the house has been sold (contract signed or earnest money exchanged). If the respondent reports that the unit has been sold, the survey does not follow up in subsequent months to find out if it is still sold or if the sale was cancelled. The house is removed from the "for sale" inventory and counted as sold for that month. If the house it is not yet started or under construction, it will be followed up until completion and then it will be dropped from the survey. Since we discontinue asking about the sale of the house after we collect a sale date, we never know if the sales contract is cancelled or if the house is ever resold. Therefore, the eventual purchase by a subsequent buyer is not counted in the survey; the same housing unit cannot be sold twice. As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated. When conditions improve and these cancelled sales materialize as actual sales, our sales would then be underestimated since we did not allow the cases with cancelled sales to re-enter the survey. In the long run, cancellations do not cause the survey to overestimate or underestimate sales.
emphasis added

The housing outlook is grim, but there is no need to borrow trouble. We are now in a period of improving cancellation rates, and this means the Census Bureau is likely underestimating actual sales.