Grading the housing market on a curve – how housing stats can be misleading

Dan Krell, Realtor®
DanKrell.com
© 2012

Home Sale StatisticsDid your teacher ever grade on a curve, where test scores are “weighted” based on the lowest and/or highest score in the class? The typical explanation for such statistical manipulation of raw test scores is to create a distribution where classmates are compared to each other, rather than how well they actually score on the usual grading scale.

The National Association of Realtors® (NAR) August 22nd news release titled “Existing-Home Sales Improve in July, Prices Continue to Rise” at first glance might seem good news, but after a deeper look the news may not be as promising. The release states that the July’s total existing home sales increased 2.3% in July from June, based on July’s seasonally adjusted annual rate of 4.47 million compared to June’s 4.37 million (realtor.org).

Although the adjusted data may have indicated a significant increase in existing home sales, the raw data may suggest something different. If you follow the links on the NAR’s press release through the website, you’ll find yourself at the page titled, “Existing Home Sales” (realtor.org/topics/existing-home-sales/data): where you’ll find a links to home sale data – which includes the “seasonally adjusted annual rate” and “not seasonally adjusted” stats.

Although July’s “seasonally adjusted annual rate” of existing home sales indicated a 2.3% increase over June’s “seasonally adjusted annual rate;” the “not seasonally adjusted” rate (e.g., the raw sales data) indicated that there was a 7.3% DECREASE in existing home sales in July compared to June, and a year to date increase of existing home sales of only 2.647%.

So, what’s the difference between “seasonally adjusted” and “not seasonally adjusted” data? Well, for that explanation, we need to follow the links to the methodology (realtor.org/topics/existing-home-sales/methodology). “Not seasonally adjusted” data is described as raw data that has been basically scrubbed for errors. However, the site states that “It is necessary to “annualize” and seasonally-adjust the existing home sales data so that month-to-month and quarter-to-quarter comparisons can be observed without seasonal variances distorting the overall picture;” thus the “seasonally adjusted annual rate” may be forward looking figure estimating a rate by which homes are selling.

And of course, many media outlets took the headline and ran with it without explaining the meaning of the “seasonally adjusted annual rate.” July’s figure gives the impression that the housing market has made significant improvement during a month where the actual number of existing homes sales decreased from the previous month. But don’t blame the NAR either: the press release contains links to pages of explanation and data for anyone to take the time to sort through and figure out.

Home Sale StatisticsStatistical analysis can be a good thing, if the statistic is meaningful and is understood. It seems as if everyone already forgot about the criticism that the NAR received last year because they announced a downward revision of existing home sales going back to 2007. If you remember, the main reason given for the revision was for “data drift” that occurred during the housing downturn; and much like other estimate revisions (such as GDP and employment figures) “re-benchmarking” is a common aspect of estimating economic data.

Regardless of what the rate of annual home sales is estimated to be, we’ll know the actual number of existing home sales at the end of the year. And at that time, we can determine what kind of year 2012 has been for housing.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of August 27 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

The economy, stupid

Is the housing bust over, or is it about the economy (stupid)?

by Dan Krell ©2012
DanKrell.com

Unemployment officeLast week’s Wall Street Journal report that the housing bust is over has grabbed everyone’s attention (Housing Passes a Milestone; wsj.com). The WSJ reported that of forty-seven “forecasters” surveyed, forty-four believe that the housing market has bottomed out. There are several factors cited by these “experts” as rationale for the stating the bust is over, as well as asserting that the housing market will not be a further drag on the economy. However, many experts may be missing some data points; as well as not recognizing causality.

Although the U.S. housing bust may be over (for now), as experts proclaim; other regions of the world are struggling. Two of the most influential economic regions, Europe and China, are experiencing real estate slumps.

According to a May 31st report in The Economist (Downdraft: European house prices are finding it harder to defy gravity), global house-price indicators point to increased volatility. Although, Europe’s housing markets experienced similar declines we experienced during the financial crisis; individual countries differed in their housing outcomes. Troubled economies, such as Ireland and Spain, continue to have lagging housing markets. Ireland’s already depreciated home prices are reportedly continuing to drop; while Spain’s home prices are reportedly over valued while prices also continue to drop. However, Germany, France, and Belgium’s housing bounced back relatively quickly and reportedly appreciated through last year.

However, as recession looms and unemployment increases in the Eurozone; The Economist reported that the pace of housing depreciation increased in weaker countries, while housing appreciation stalled in Germany and France.

The other big economy that may also show signs of stalling is China. China’s recent GDP growth was reported to be 7.9%. From a bustling economy that reported GDP growth over 10% in 2010, and GDP growth over 9% in 2011, the shrinking GDP may be a signal. Although overall Chinese housing prices are reportedly flat, some have reported that some provinces have experienced as much as a 30% drop.

Although the Chinese housing market is a bit different than the U.S., (private property ownership is a relatively recent development); albeit volatile, housing is a component of the Chinese economy. A December 2011 report by Patrick Chovanec in Foreign Affairs (China’s Real Estate Bubble May Have Just Popped) indicated that Beijing new home prices dropped 35% in November 2011. Property agencies reported that new home inventories are building and buyers are hard to find.

Additionally, The China Perspective reported in January that re-sale home sales volume dropped about 23%. As a result, real estate agencies are closing offices. It was reported that an average 3.8 offices closed daily in Beijing; while the number of real estate agency offices in Shanghai has been reduced 40% since their housing peak.

Unemployment officeAs other global housing markets stall, there may be a silver lining. The devaluation of residential real estate abroad has attracted foreign investors to U.S. housing. Although international buyers have bought homes at all price levels, the luxury real estate market seems to be attracting most attention.

But back to what the experts proclaim as the bottom of the market – yes there are some positive signs, but it’s too early to tell if the bust is over. And although these experts proclaim that housing will no longer drag the economy; the reality may be that it’s the economy that’s dragging the housing market.

More news and articles on “the Blog”
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 16 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.
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