How do we gauge the housing recovery? Follow our tips, and we'll show you the way.

In case you’re late to the party, allow us to bring you up to speed – various sources are saying housing is inching towards recovery. Existing-home sales were up 9.6 percent last month, new home sales 19.8 percent, and here in Chicago, sales soared by more than 25 percent. And as we just reported earlier today, even prices are back to positive territory in the S&P’s hugely influential Case-Shiller.

To help you navigate the data maze, we have three quick, easy points to keep in mind when surveying all the housing data of the last week.

1. New Home Sales are the Big Enchilada of Recovery Data – New home sales are the most important indicator of where the housing market (and the greater economy) is heading, because they are so involved with construction, manufacturing and other sectors that strongly impact both GDP and employment. As Edward E. Leamer, a professor of management, economics and statistics at UCLA told us, “Jobs and earnings are mostly dependent on new homes, not existing homes. On that front, there is some very encouraging news out there – both sales of new homes, housing starts and building permits.” In the latest Census Bureau data, housing starts were up 28.5 percent and permits 25.0 percent, and as Bill McBride noted on his Calculated Risk blog, new home sales are up 35 percent from their post-boom low.
2. Focus on the Composition of Existing-Home Sales – It’s definitely a good thing when existing-home sales go up, but to better gauge how the recovery is going, it’s more important to look at is the composition of those sales, and what share distressed sales are of the market. In May, distressed sales were a quarter of all existing-home sales, and though that’s down from 31 percent last year, it’s still a large share of the pie. The larger share that conventional sales are, the better the market is doing.
3. Keep Your Eye on the Distressing Gap – Something else McBride points out is that a “distressing gap” currently exists in housing. Because there are so many distressed sales, existing-home sales are inflated – and because of that, new home sales are depressed, as builders have no incentive to build new properties with so many existing homes on the market. The closing of that gap will be yet another thing to focus on as the market recovers.

Don’t get us wrong – big numbers are great. We put them in our headlines all the time! But as McBride and Leamer point out, we’ll need to maintain our focus on the nature of those numbers to effectively judge where the housing market is heading in 2012 and beyond.