This wasn’t supposed to Housing Monday, but that certainly seems to be what is happening — especially after I saw this blasphemy cross the tape . . .
It seems that Greg Ip, the WSJ’s acting Fed pipeline, has discovered that — shocking! — data can be slanted and/or manipulated.
However, he manages to find data that understates the strength in the housing market:
"New-home price gains are slowing, but not by as much as you might think. For the past year the growth rate in new-home prices has been artificially depressed by a change in the sample of homes used to calculate the price.
Last year, the median new-home sales price rose 7% from 2004, a considerable deceleration from the 14% gain in 2004 over 2003. The slowdown appeared to gather pace through the year, with December’s median price actually down 0.3% from a year earlier.
Then, the January new home sales report released Monday appeared to
show a rebound: the median home sold for 7% more than a year earlier.
What’s going on?"
What makes this so astonishing is how Ip — the Journal writer with the greatest access to the Fed , and the person that Greenspan used to leak out information/spin to — has managed to ignore the Fed’s reliance on data we know to be widley misrepresentative of reality: The undue emphasis on Core CPI, ignoring the 5 year uptrend in Energy; The Owner’s Rental Equivalency versus actual Housing Costs; And (of course), the absurdity that is the Leading Economic Indicators.
Here’s the data point which Ip focuses on:
"New-home sale prices are always tricky to analyze because they are heavily influenced by the mix of homes sold: more luxury home sales will tend to bias up the figure, more homes sold in the south or Midwest, where prices are lower, will bias it down.
But in the last year an additional issue has muddied the trend. In January 2005, for the first time since 1985, the Census Bureau updated the sample of local permit offices it checks to track new-home construction and prices. A lot changed between 1985 and 2005. Older, pricier areas became heavily built up and activity declined. In newer, outlying areas, where prices were generally lower, construction picked up. The 2005 sample thus has a larger share of those newer, cheaper areas. Comparing 2005 figures to those in 2004 will give the impression of a slowing in price gains, but that’s somewhat artificial.
Michael Carliner, an economist at the National Association of Home Builders, estimates the sample change may have depressed price gains by about five percentage points. He cautions there are so many factors pushing the numbers around it’s impossible to be precise. But using that figure suggests gains last year were closer to 12% than the reported 7%, which would put them more in line with the existing home prices and the price index published by the Office of Federal Housing Enterprise Oversight."
You see, the housing market is actually stronger than you have been led to believe. Well, at least the very high end of it is, and that’s what is skewing the numbers.
To be fair, Ip does discuss the actual slowing trend in housing:
"That said, Mr. Carliner says it’s clear that a slowing is underway, both in the data and in the information he is hearing from member firms. In particular, luxury home sales have slowed notably, so low-end houses are more heavily influencing the mix of sales. "It’s not that the same house will cost less but we are selling more at the lower prices." (That should affect the average price more than the median price, however.)
Moreover, the Census Bureau’s constant-quality price index of new home sales corroborates the story of slowing gains. That index compares houses with the same characteristics and in the same regions to their equivalent in prior periods, and it shows a 0.3% drop (not annualized) in the fourth quarter from the third. The year to year increase fell to 4.8% from 8.5% in the second quarter."
This will likely be an article in tomorrow’s WSJ . . .
UPDATE: February 27, 2006 3:25pm
Part of Bernanke’s Princeton speech from this past weekend just ran on CNBC: The clip was his quotw on Core CPI . . .
Sample Change Distorts New-Home Price Gauge
WSJ, February 27, 2006 12:45 p.m.
This bit of text:
“…the Fed’s reliance on data we know to be widley misrepresentative of reality: The undue emphasis on Core CPI, ignoring the 5 year uptrend in Energy; The Owner’s Rental Equivalency versus actual Housing Costs; And (of course), the absurdity that is the Leading Economic Indicators.”
suggests the Fed relies substantially on core CPI, including owner’s equivalent rent, and LEI data in making policy. Fed officials pretty routinely complain about CPI, which would include the rent component, and I can’t remember the last time a Fed official mentioned the leading index. You may think the Fed relies on faulty data (and Fed officials would agree) and you may harbour a special distaste for certain data series, but sticking them together in that statement seems a bit misleading.
The Fed does rely on Core CPI, and its been in everyone fo their minutes for God knows how long. Plus:
1) Greenspan has mentioned LEI numerous times in Congressional testimony;
2) We have clearly shown — repeatedly — how the Home Owner’s Renter’s Equivalency versus actual Housing Costs has artifically depressed CPI;
3) The Fed’s reliance on Core CPI is well established.
The Fed cites the core CPI but does it rely on it at the expense of, or in preference to, other data?
(We are nuanced nit-pickers Barry.) [ We are relying on you (not always in preference to k harris) to keep our nit-picking skills honed.]
Was it substantial reliance or merely customary citation to the usual sources?
k harris seems to point out (I say this with some , not total, reliance) the doubtful logic (He was more polite and used ‘misleading’, but it didn’t work. He was too kind.) of citing a suspect series (the urban/suburban housing data skews house price trends for the period 00-04) and a core CPI that looks at rental proxies somewhat removed from those prices.
It was a very gentle post, no?
In the last 7 days or so, the major US indices are at multi-year highs, while some minor, but important ones, at all-time highs; the Japanese mkt is at multi-yr highs & for the first time in 4 years its trade numbers showed a deficit ( which I interpret as evidence of REAL demand picking up); meanwhile, the German IFO confidence was the best in 14 years ( only 14 months or so after they posted the worst jobless figures since WW2)… Of course, these OECD guys are still way behind the meteoric rise of just about all emerging markets (recycled ME petro dollars putting in the tops over there?)
though, I do not agree at all with the BR’s BW forecast for a deep-in-double-digits-decline of US market’s for the year end…
I am wondering… if this IP ‘catch’ might just be enough for managers to throw-in-the-towel on the U.S & start trading the end-of-’04-headlines ( again ), that the $USD will lose half its value ( or more) before it is fairly valued and we are all balanced; in which everything U.S is pummelled until a few weeks before the fall elections ?…
thus, FINALLY delivering SRoache’s rebalanced-world & hoped-for-scenario, only a month after he gives up on that systemic dislocations rant and goes balls-bullish on US equities ? (after sitting them out…uh… what… like … the last 2 decades ?….)
Could IP’s “find” be that Monty-Python-Meaning-of-Life-after-dinner-mint, that causes a gastric convulsion-like correction of 15 to 20% for the next 7 months or so…
hmmmm… probably not….but if the big financial bailout or fallout that everyone’s waiting for in this round of hikes, turns out to be USGovt Econ data !!!… ugh… that will not be pretty…. ( FNM & FRE to receive the most vicious selling in that scenario?)
if so.. then there are some housing stocks, internet, & mineral companies that will end-up trading at serious discounts to their cash generation viability &/or book/asset values- I will buy with both fists as I believe that 4thQ of’06 & going forward through to the end of the decade, the U.S. , in particular, (but all of the OECD) will see deep double digit equity returns y-o-y…
though most likely just a pathetic grope for my own hoped-for-scenario, what’s the worst that could happen as a result of IP’s sleuthing?