The Housing Mirage: Misleading Numbers

The existing home sales data which was released to the market earlier was a “half empty, half full” set of data. The market seemed to take it as just full and left the empty part behind.

Home resale rates rose 5.1% in February to an annual rate of 4.72 million, according to the National Association of Realtors. In the same breath, the organization said 45% of the activity was foreclosures or short sales.  Because of the huge discount that most buyers get when they buy homes in foreclosure, the average price of a house fell 15.5% to $165,400.

The increase in the rate of home sales was viewed by many as the beginning of a bottom in the housing market. The slide of nearly three years has been blamed for a great deal of the collapse in the banking and credit systems.
But the rise in sales does not represent a bottom at all. It is more likely that any movement of buyers into the market will cause desperate sellers to offer homes at lower and lower prices rather than hold onto houses that they cannot afford and may not make money on even if they could hold them for another decade.

Most data that the government and national business associations will put out over the next several quarters is likely to appear two-edged, at least at first. Housing prices cannot go to zero, so, at some point, the rate at which home values are dropping will slow. Resale rates may go up, but buying homes which have been in foreclosure for months is an incorporeal piece of information. If buyers start to purchase homes on the normal economic basis of being a transaction between private buyer and private seller then the market will have something to celebrate.

The rise in the dual nature of data is where the analyst’s ability to forecast gets more difficult. When unemployment, consumer confidence, GDP, manufacturing, and capital expenditures are all falling simultaneously, it is hard to find optimists, but they will grab even the slightest bit of ambiguous information and claim that the recovery is underway.

In the next quarter, the rate at which people are losing their jobs may slow, but average wages will probably drop sharply at the same time. The effect of fewer people losing jobs while those who are working make less is no clear sign that the economic world is getting better. GDP numbers which are significantly influenced by dangerous trends in inventories like the Q4 2008 figure defy clear interpretation.

Recently analysts covering the manufacturing sector said that so many factories are shut here and overseas that the businesses are eating through inventories. That is being interpreted as good news because once inventories move close to zero, factories will have to increase production to replace them. That analysis glosses over two possibilities. The first is that the economy is bad enough that inventories may not drop at expected rates. Low demand may cause them to decrease much more slowly. That could push back a renewal of manufacturing activity for months. It is also possible that some factories will simply be out of business and the sources of goods for replacing dwindling inventories will have gone away. The normal supply chain in some industries may be severely disrupted in a way that will take several quarters to repair. Retooling or replacing factories is unlikely to be a quick process.

From the middle of last year until a month or so ago, the interpretation of almost all economic information was negative because the data was unidirectional. That is changing. There are sign posts which point in two directions. It is likely that neither road sign is entirely right. In many cases both are wrong and making predictions about how the recession is going actually becomes more difficult and not less.

Douglas A. McIntyre