Lies, damned lies, and statistics

Lies, damned lies, and statistics

Those who don’t understand the meaning of the numbers can be easily manipulated. Not only can economists and journalists confuse people with numbers, so can crooked mortgage originators, real estate agents, and companies who give credit to young (and not so young) adults.

Economic “news” is frequently poorly written for those who do not read the whole article. Since many people skim articles they read, it is easy to misunderstand the entire article. I also find that the title can actually contradict the data. This can be confusing and is sometimes intentionally misleading. Readers, beware of numbers and people who sling them. Many people are uncomfortable with numbers and statistics. I would like to guide you. Today, I write about real estate economic news. Those of you who have followed me from the beginning of my blogging at Boston.com know that my father taught me how to understand the use of numbers found in newspaper articles.

I saved this article from the Sunday Boston Globe, Trey Skehan that explained the use (and misuse) of averages, medians and means in discussions of income. Thank you, Trey Skehan explaining to readers how numbers lie when readers don’t know how to read them. (If you are not a Globe subscriber, it is too old to see.)

I frequently get questions from my clients about an article about “real estate going up.” I read it and realize it is about volume, not price. When you look at most real estate articles in the press, the reporting frequently mixes sales volume and sales price.

fnc1-14.nationalSo, what is going on right now? Prices are going up in a “seller’s market.” There is increased demand from buyers who delayed purchasing when prices were going down. Low interest rates are also spurring buyers into the market. There is decreased supply because some sellers still cannot sell, because they bought at the last peak and cannot get their equity out at current prices. There is also decreased supply because people are staying longer in their bigger houses. The cause of this is both better health of older Americans and a cultural shift toward independent living.

Back to statistics:

If the topic of a real estate article is volume, there are other questions to ask. Knowing the change in sales volume without knowing the on-the-ground market conditions is predictive of nothing. When sales volume goes up or down, it indicates a problem with either the amount of supply or demand. Whether volume goes up or down is not a predictor of price unless you understand why it is changing. If there is decreased demand, it is a buyer’s market for those in the small demand pool. If there is decreased inventory, it is a seller’s market for those sellers who have desirable properties to sell in the small supply pool. Both these conditions lead to fewer overall sales. Get it? One will lead to falling prices, the other to rising prices. In the current case, supply is down, demand is high. Real estate sales volume may turn out to be higher or lower than average.

How is the rate of price increases measured? The most frequently quoted sources overstate the increase in sales prices. Since this is good for the so-called “real estate industry,” no one calls them on it, but me. When you see a statistic, check to see what it is measuring. Most real estate price indexes look at the changes in median price or property-to-same-property resale price. Only my favorite, FNC, factors in the cost of repair and improvement. As anyone out there house-hunting knows, it is the renovated properties that sell high and quickly.

So, what is the headline? Demand is high. Supply is low. Prices are going up.

 

By | 2016-12-28T14:01:13+00:00 March 19th, 2014|Categories: Market data and conditions, Money and finance, Uncategorized|

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