For those of you who are more than passive market watchers, you'll probably already know that new home sales plunged in February. The Commerce Department announced that the number of newly-built houses sold in February was 1.08 million. In January, that figure was 1.2 million. The 10.5 percent difference between the two was the biggest single-month drop in the last nine years.

The data is academic. What we were far more interested in was the ramifications that the financial media gave the public. In a nutshell, Wall Street felt that the clear slow-down in the real estate market would mean the Fed is right on the verge of halting the rate hikes. At the Fed's meeting next week, investors are expecting to see the Fed raise the Fed Funds rate by a quarter percentage point, to 4.75 percent. The evidence of a slowing economy and contained inflation is just further evidence - at least to the market - that rates won't rise much further.

Being inherently skeptical, I questioned the cause/effect relationship between housing and interest rates. Yes, demand is largely dictated by borrowing expenses, but I'd just rather not leave it up to the media to tell me how things work. After all, many journalists rarely let the truth stand in the way of a good story. In this case, the results we found were pretty mixed. We were pleased to find that, sometimes, a weakening housing market can and does coincide with a slow-down in interest rates. Sometimes, it didn't. In either case, we still completely disagree with the cause/effect rationale given though. The Fed and Mr. Bernanke are looking at a LOT of other data besides housing trends when making interest rate decisions, and preventing a painful bursting of the housing bubble really isn't one of their priorities. We'll just suggest that the model is a lot more complicated than "low rates = strong housing market"

In any case, prior bumps in the road for new homes sold have indeed marked some tops in the Fed Funds rate. For instance, between December of 1990 and January of 1991, new homes sold fell from 464,000 to 401,000. The Fed Funds rate was already on the way down at the time, from a peak of 9.85 to the then-current rate of 6.9. However, once those new home sales hot that bottom (and they had already been sinking), the Fed really went to work dropping interest rates. The Fed Funds rate fell from that 6.9 level to an ultimate low of 2.92 by the end of 1992.

Something similar happened in February of 1995. New homes sales fell from 626,000 in January of '95 to only 559,000 in February. Interest rates had already been on the rise, from 3.0 in mid-1994 to 5.9 in early '95. By April of 1995, the Fed Funds rate had peaked at 6.05, and started to level off. They wouldn't get above 6.0 again until the year 2000.

The problem is, these big single-month drops don't always end up sending rates lower. Between April of 1987 and May of 1987, new home sales fell from 735,000 to 651,000....an 11.4 percent dip. Interest rates were already on the way up at the time, but even with the big plunge in home sales, rates kept on rising. Between then and March of 1989, the Fed Funds rate moved from an already high level of 6.4 to 9.8. The difference in new housing sales between December of 1993 and January of 1994 was even worse, yet the Fed didn't even flinch. New home sales plunged from 812,000 to 619,000....a 23.7 percent hit. Rates were at 2.96 percent at the time, but did nothing but go higher from more than a year, reaching 6.0 in April of '95.

The point of all this? Just to reiterate that just because something is in print and from a credible source doesn't make it true, or meaningful. Maybe the housing market really is finally starting to cool. Maybe the Fed is near the end of the rate hikes. Or maybe not. What we do know for sure is that big plunges in housing sales do NOT mean the Fed is suddenly interested in changing their game plan......history has shown us that fact. If you're counting on the Fed easing off on the incremental increases in the near future, that's fine. If you're counting on that only because of the home sales data you heard yesterday, you may want to fill in some of the data gaps that the media didn't.

Some of that data includes......

• 1) The Fed Funds rate is still well under long-term norms, which means any rate slowdown is likely to be temporary
• 2) The Fed has pushed rates higher plenty of times while the housing market was getting weaker and weaker.

Now, with all that being said, I still agree that the interest rate increases are going to slow up. I just don't think it's going to have a lot to do with housing sales, which have been generally moving higher since 1990, regardless of what interest rates were doing. However, I can't quite get on board with the idea that new home sales are going to continue to implode. One month does not make trend. My ultimate beef, though, is relevance. I shudder when I think of the number of investors who made major decisions yesterday based on information that is shaky, at best.

Be sure to take a look at this chart, which shows the S&P 500, the Fed Funds rate, and the New Homes Sold data (click to enlarge). You'll see that there's little to no correlation between rates and new home sales.

JB