Federal Statistics Versus Local Realities

This morning the Federal Housing Finance Agency released it's very important quarterly report on the housing market, titled "Record Home Price Declines in Fourth Quarter; Isolated Pockets of Strength." Of course we know that one of those pockets of strength is the Black Hills market.

But with so much turmoil and uncertainty in the nationwide mortgage and real estate markets, many of us are looking for "hard data" statistics to cut through the noise and guide our real estate decisions. But wait. Even hard data, when examined up close and with healthy skeptcism can be shown maleable to bend to any purpose.

Here's my point: Never ever take any statistic on face value (real estate or otherwise). Always look one level deeper than the real estate statistic you hear or see, to discover, "what is it that I am not being told about this?" When you hear a number, ask "Where is the underlying data that statistic came from?" Then ask in turn, "How was that underlying data collected?"

How do I know this? I completed studies for a master's degree in theoretical statistics. I was employed writing computer software to calculate statistics for a research center. I know how to make just about any statistic prove just about any pre-conceived idea. You name a viewpoint you want to support, and a good statistician can produce very impressive hard-data factual evidence to prove it.

Here are two examples to "prove my point."
(Oops, after this lead-in, do you believe any one who claims he is about to present evidence to "prove" his point?)

Here goes anyway.
1. "Housing prices are way up (or down)"
Uh huh. Based on what data? Some of the major housing-price statistics are based on data on mortgage applications, such as appraised value. New mortgages can apply to things entirely unrelated to buying or selling a house, such as refinancing, but those mortgage appraisal numbers get included any way. When you refinance your home, an appraiser submits a report of home valuation. That gets stirred in with home values for homes that actually do sell. The chart above shows how the proportion of mortgages due to "cash-out re-fi's" (home equity loans) have skyrocketed since 2003. Meanwhile the proportion of purchase-mortgages has plummeted.
So when you hear that "home prices have increased, based on home mortgage application data" keep in mind that it may be largely the result of simply, people who re-finance may own homes that are more expensive than the homes that people are actually buying. In fact, that leads to our second example.

2. "Houses that sell are selling for less than a year ago."
Hogwash. How many houses sell one year, then again the next year. Nearly zero. My real estate market research team examines what is behind these data, in great detail. For example, we look at what is happening in different price-bands. The low band is $100,000-$125,000. The upper band is $300,000-$350,000. (The median sold-home price in this area is around $180,000.)
We have discovered that each of these bands constitutes its own unique real estate market. Things that are true of the lower band are sometimes the opposite of what's happening in an upper band.
For example, we see that the market in lower priced homes remains relatively stronger, while more expensive homes are selling more slowly. As mentioned in a prior post, if more people are choosing this year to buy smaller/downsized homes, then of course the "average price of homes sold" this year will be down from earlier when people were buying McMansions.
While we're on a roll, I'll add one more example of how easy it is statistics to lie to us even when based on "hard data." That is when hard data are omitted, and we don't know it. One set of housing sales data often cited here in our market suggests how long it takes for homes to sell and at what prices. I have observed that many agents do not seem to realize when they cite these data, they don't seem to even be aware that 35% to 40% of the data is left out of the statistical calculations. Specifically, some of the "Black Hills real estate statistics" do not include 30-some percent of the transactions that occur up in the Black Hills, away from the immediate Rapid City area.
No one is lying when they naively quote these statistics. But they aren't necessarily telling the whole truth, either.
What can you conclude from all this? First, the real estate market has become a real estate mine-field of uncertainty, confusion and risk. For both the agents and for consumers. It has never been more important to hire a full time, intensely thorough and well-informed real estate professional (an "agent") to help you through the maze. Second, when you select the agent, be sure to pick one that not only knows the hard data on the real estate market, but also one who knows what's misleading about some of the data, and how even hard data can be innocently bent to just about any conclusion.
Caveat emptor. Let the buyer beware.
-Lee