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We are in the eye of the housing hurricane. Existing home sales hit their lowest rate in five years in July, the National Association of Realtors reported today, but since sales were effectively unchanged from June—down a slight 0.2 percent—there were immediate efforts by some speculating that the worst part of the housing slump is behind us.

Don’t buy it. Those claiming this month-on-month flatness in existing home sales reflects the bottom before a rebound should dig more deeply into the data. First of all, sales were down 9 percent over July 2006, an indication that significant weakness in the existing housing market persists. Moreover, sales last July were already below average for 2006, so 9 percent below an already below average figure is no cause for celebration.

What’s more, this July data was gathered before the early August credit crunch that roiled stock markets around the world. Credit was tightening through July, to be sure, but the sales figures reported today by the NAR reflects the last hurrah of the loose credit era, not the beginning of a recovery.

All this is alarming enough, but an even better indicator of the housing sales slump on the overall health of the U.S. economy—new home sales—was released late last week. And here, too, the silver lining of a July increase masks dark clouds. Sales of newly built homes in July were up 2.8 percent over June to an annual rate of 870,000 houses—seemingly an indicator that at least one sector of the troubled U.S. housing market is not in trouble. Unfortunately, the apparent gains are likely overstated, as the new home sales data includes cancelled sales in its statistics.

Indeed, the Census Bureau helpfully explains that “as a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated.” That’s probably the case, as the nation’s big new-home builders know only too well. Robert Toll, the chief executive of luxury home builder Toll Brothers, reported late last week that his company has “experienced a much higher rate of cancellations than at any time in our 21-year history as a public company,” adding that “while our cancellation rates are at the very low end of the range compared to the other major public builders, they are still, for us, quite elevated.”

Toll Brothers’ cancellation rate of 24 percent looks quite respectable when compared to the 35 percent rate at K. Hovnanian and the astronomical 48 percent at WCI Communities last quarter. In fact, when the New Home Sales data are compared to previous periods other than June, we can see that there remains cause for concern.

Last month’s sales were down 10.2 percent over July 2006, and so far, this year’s sales (January through July) are off almost 21 percent compared to last year at this time. Additionally, while July’s new home sales numbers were up over June, they lagged April and May’s numbers.

The New Home Sales data is often taken as a barometer of the broader economy’s strength or weakness. An uptick in sales is generally an indicator of increased demand for new homes, which means an increased demand for construction jobs and a sign for growth. In July, however, the uptick—assuming there was one after cancellations have been accounted for—reflects a working out of the backlog of unsold new houses, so the bump in sales reported is ultimately a poor indicator of any strength in construction jobs.

New homes are reported as having been sold before, during, or after construction. Among homes sold after construction, the median house sold 6.1 months after completion. This is the longest lag between completion and sale in a year. Last July the lag was only 3.6 months, and the lag has grown consistently longer since September 2006.

Not only are unsold houses lingering on the market longer after completion, the share of houses being sold while under construction dropped markedly, to 29.7 percent, its lowest level in 2007. Looking forward, that indicates there will continue to be a backlog of homes unsold by the time construction is completed.

The growth in the backlog of unsold new homes mirrors the growing supply of unsold existing homes as well. Since January of this year, the supply of houses on the market rose from 6.6 months to 9.6 months, with each month showing an increased supply over the previous month.

Homeowners looking to move are likely to have a large supply of houses to choose from for the near future, assuming they can qualify for financing and sell their existing homes—both increasingly challenging propositions. As for the housing market as a whole and the overall economy, this month’s new and existing home sales data should be viewed as a pause in a decline rather than an absolute bottom; it is a snapshot of the last days of the loose credit era.

The upshot: we can continue to expect a significant drop-off in new housing permits and construction starts. July’s housing starts were already off 21 percent since July 2006. And several of the large homebuilders have already indicated to their investors that they plan to cut back on production. New housing construction has historically been used to “prime the pump” when the economy flags. Given widespread weakness in that sector, we need to be ready when the pumps fail and the hurricane comes.

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