Wednesday, August 26, 2009

Durable Goods and New Home Sales: Deciphering Government Noise

The string of positive economic news continued today, as orders for durable goods - bigger ticket items expected to last at least two years - rose 4.9% from a month ago. This news was accompanied by a report which showed new home sales rising 9.6% from a month ago. Unfortunately, both data points could have been significantly influenced by short-term government programs; a prospect that now forces investors to decipher which pieces of economic news are in fact positive, and which are the result of a government distortion.

We all know that Cash-For-Clunkers was a major success, at least in the short term, for overall sales of automobiles. When looking at the durable goods numbers, it's important to realize that new auto orders were included in this data. Whether the rise in durable goods orders is sustainable will be tested in the coming months.

With new home sales, the reality is that buyer's most likely took advantage of the first time home buyers tax credit with a slight bias towards new homes. Builder's are able to price new home more attractively than the individual homeowner, and can offer very appealing incentives. Many homebuilders are offering to pay a buyer's mortgage points, effectively lowering the interest rate to below 5% on a standard mortgage product. A seller of an existing home has an outstanding mortgage balance to contend with, and might not be able to compete with a public corporation's ability to write down the value of newly sold homes for tax purposes.

I don't want to convey that there is no reason to have hope for an economic recovery; the point is that digesting data now, and in the near future, will require a second or third look to determine the actual viability of a developing trend. Sphere: Related Content

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