Unreliable housing statistic of the day

By Felix Salmon
December 21, 2011

How many existing homes (as opposed to new homes) were sold between 2007 and 2010? The job of counting such things is outsourced to the National Association of Realtors, which up until yesterday said that the number was 20,629,000. Today, however, it released revised figures, saying that the true figure is 17,680,000 — a difference of 3 million homes. At an average of say $250,000 apiece, that means the economy saw $750 billion less in economic activity, over those four years, than the NAR had given us to believe. That’s real money.

Here’s the NAR’s official chart of the old and new numbers:


In one sense, this shows that the housing slump was much worse than we were told. But in another sense, what we’re seeing here is fewer people selling their homes at a loss. And what that says to me is that it’s going to take a very long time yet before we get a healthy, clearing housing market.

There are three factors making today’s housing market highly artificial. The first is historically unprecedented interest rates: the average 30-year fixed rate mortgage in November was taken out at just 3.99%. That creates a temporary speculative lift for the housing market, and raises serious questions about whether today’s housing prices can withstand a return to normality in the mortgage market. The connection between mortgage rates and house prices is by no means simple or predictable. But insofar as houses are being bought — and house prices are being supported — by investors looking to make money by renting them out, we could well see another downward lurch if and when today’s insanely low mortgage rates go away.

The second factor, related to the first, is that no sensible banker will lend money for 30 years at 3.99% — you just can’t make money that way. Which means that the US government has essentially become the sole lender to Americans looking to buy houses. At the same time, Democrats and Republicans are agreed that the current situation can’t be allowed to continue indefinitely. But the private sector has no interest whatsoever in stepping in where it was so badly burned in the past — neither banks nor bond investors want to buy mortgages these days, and it’s hard to think of what would make them change their mind. Except for a tiny sliver of jumbo mortgages, the private mortgage market in the US is dead, and showing no signs of being resuscitated. How much would you pay for a house today if you had no assurance that, when you come to sell it, most potential buyers of your home will be able to get a mortgage? It’s a real worry, and it’s going to become increasingly salient.

Finally, there’s the well-known phenomenon that house prices are very sticky on the way down. If you can’t sell your house without bringing a check to the closing, you’re likely to delay selling your house for as long as possible. And there are millions of houses on the market which have just been sitting there at unrealistic prices for well over a year — the owner won’t take less, but no buyer would dream of paying that much. That has created an unhappy overhang of unsold houses — and an even greater number of houses which people would love to sell, if only there were a decent market to sell them into. It’s the very definition of a non-clearing market, and today’s revisions only go to show just how few houses have been clearing the market for years now.

How all these factors are likely to play out over the next few years is impossible to predict; Neil Irwin, for one, reckons that housing “finally seems to have found its bottom — and may even be starting to bounce back.” Today’s news from the NAR, if nothing else, serves as an important reminder that housing data is messy, and prone to very large errors. Which means that anybody crunching numbers to come to a considered conclusion has to build in a large amount of GIGO risk.


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One thing hits me from your article – the degree of government involvement in the housing crisis. Government has NO PLACE in the provision of mortgages. Whoever set up Fannie Mae and Freddie Mac should be shot (I mean that figuratively of course; some of you folks have too many weapons and more than an inclination to use them sometimes).

What business does the govt have setting 30 yr fixed rate loans? They should be concentrating on fiscal policy, the Fed should arrange monetary policy, and the market should look after the mortgage market. The problem of course is when house ownership becomes an ideological goal.

Non-recourse mortgages, long term govt supported fixed rates, and securitsation of mortgages have culminated in the mess everyone’s in at the moment. But can you really expect anyone in the GOP to vote to get rid of any of these things? Certainly not members of the Tea Party: they play the self-interest card too often to break the habit now.

The irony is, that means the US will continue to have a govt controlled mortgage market because of the votes of those who believe govt activity should be passed over to the market because govt is too big.

Posted by FifthDecade | Report as abusive

“$750 billion less in economic activity”

It is no such thing. Simple transactions are not “economic activity” in any productive sense. This is exactly the kind of thinking that is hamstringing our society as our leaders chase silly figures like GDP that have little correlation with how well people are actually doing.

If I trade you my sock for $1,000,0000 and then you trade it back to me for $1,000,000 we have in no meaningful sense “increased the economic activity” of the US.

Economics have become slaves to their measurement tools instead of thinking about how the economy works and sticking to first principles. I swear economics was in some ways more sensible in the 1700s when Colbert was first outlining mercantilism.

Posted by QCIC | Report as abusive

@QCIC: So because the seller received the same amount of money that the buyer disbursed, no economic activity took place?

Your sock analogy is flawed, the housing market does not consist entirely of repurchase agreements. In order to reflect the subject at hand, the sock would have to be traded to someone else besides you for $1,000,000. If we assume that was the case, then because you traded your sock (assuming it was not part of a repurchase agreement) you have helped to create a market in used socks. If you bought back a used sock (perhaps you lost one in a dryer) you have helped to create a market in used socks. The price you trade your sock at helps to set the price of all used socks.

Declaring that trading goods for money (and the reverse) are not economic activity belongs to what school of economics?

Posted by k9quaint | Report as abusive

That’s only a 17% error by the NAR. What do you expect? Hey they did better than the crapheads running the stock market and banks! How about a great big hand for the less inept!

Posted by Woltmann | Report as abusive

“Economics have become slaves to their measurement tools instead of thinking about how the economy works and sticking to first principles.”

Well put, QCIC.

Economics has its basis in production and consumption. Sale of an existing home to a new owner is neither. Similarly, if a producer sells a widget to a wholesaler who sells that same widget to a retailer who sells that widget to a consumer who gives it to their child, you have ONE widget produced and ONE widget consumed. Doesn’t matter how many times it changed hands.

This isn’t to say that economic measures are useless, but they are frequently misleading ESPECIALLY when you have large structural changes in the nature of the economic activity. The housing bubble and its bursting certainly qualify as “large structural changes”, thus any economic measures from the past decade must be treated with suspicion. They might not mean what we think they mean.

Posted by TFF | Report as abusive

@k9quaint asked “Declaring that trading goods for money (and the reverse) are not economic activity belongs to what school of economics?”

well, according to the way we calculate GDP, for one:

http://www.calculatedriskblog.com/2011/1 2/impact-of-nar-revisions-on-gdp.html

Posted by KidDynamite | Report as abusive

Then new reality in the residential property market is simply the following:
1. There have been much less residential properties sold in recent years than previously reported. Therefore:
2. There are far more residential properties waiting to be sold, i.e. a much bigger inventory of unsold properties than previously estimated, including the ‘shadow inventory’ of properties held by the banks, and not yet offered for sale. Therefore:
3. According to basic laws of supply and demand, the supply side in the real estate market will keep driving prices down in years to come, and the crisis in this market is far from any recovery. This market may even be heading towards a new, deeper phase of the crisis.

If you had planned to sell your home and have been waiting for some good news, the new reality you have to digest is that there are far more sellers in your market than anyone had previously thought.

Posted by realitystrikes | Report as abusive

Most Americans probably couldn’t imagine a world without the 30 year fixed mortgage. Meanwhile those of us in the rest of the world manage just fine, hence most places in the world haven’t experienced anywhere near the same type of housing price crisis that the US is currently going through.

To me, the idea of a fixed 30 year mortgage is bizzare (though I have to admit I’m totally jealous of someone borrowing that much money at 3.9% for 30 years).

Posted by Mike.Gayner | Report as abusive

@realitystrikes, it seems that a surprising fraction of the housing boom was driven by people owning two (or more) homes, either rental properties or vacation homes. We simply don’t have enough population to fill the existing homes, especially with the younger generation choosing to economize rather than establish households of their own. (They can’t afford to do otherwise.)

When there is a limit to what people can/will consume (and nobody wants to own two homes in a falling market and shaky economy), prices can fall indefinitely.

Open our borders?

Posted by TFF | Report as abusive

@KidDynamite, the link you provided supports my position. The portion of the sales price that represents the broker fees contribute to the GDP and are counted as such. GDP is the final total of goods and services, and the real estate broker provided a service. The sale of a home has other effects on the economy besides the GDP (which is just a measurement of one aspect of an economy). For instance: one house sale can change the size of HELOCs for all the houses around it.

Posted by k9quaint | Report as abusive

Thanks for the link KidDynamite. I read calculated risk daily but in scanning the posts I didn’t think this particular post was very interesting. But the distinction between “economic activity” and GDP is important (and interesting!)

Posted by fresnodan | Report as abusive

The point is that portion of GDP that is now lost (the broker’s fees) is not a portion of GDP anyone should care about anyway.

Money spent on brokerage is always a net drain on the economy. You want to minimize it as much as possible. In many cases it is a necessary service, but it is an evil that should be minimized, not a good that you should actively want.

If everyone suddenly starts going for walks in the park instead of watching TV the country isn’t magically poorer because we consume fewer TVs. You simply re-purpose that consumption to other areas, and to the extent we do any production of TVS re-purpose that as well.

Economists have the functioning of the economy backward. They sit at stare at the outcomes so hard they forget about the processes creating those outcomes.

Posted by QCIC | Report as abusive

bankers may not make 30 year loans at these rates, but what makes you think governments are, and which governments? fannie and freddie are up against portfolio caps and buy almost none of their own new product. treasury hasn’t bought mortgages in over a year, and the fed was out of it until just recently, when they got back in to a fairly small extent. so what governments do you think are buying all of this mbs that we’re producing?

Posted by mortie22 | Report as abusive