Sept. 15: Rex Nutting, in the first BizzyBlog comment, noted that he e-mailed me support for how he calculated the item I contended needed correcting (which he believes does not, and therefore will not correct). I had to spend some time reverse engineering what he sent, because he did not provide a detailed calculation to support any of the figures he provided; those figures did check out, but doing so took time.
I will cover the dispute in detail Monday. I apologize for the delay, but will give away the ending in the interest of a peaceful weekend -- His calculation uses an averaging method that, while commonly used and therefore not "requiring" a correction, is nevertheless mathematically incorrect, as I will show in detail when I put the post up on Monday.
Overview: Over the past few weeks, in his reports, his e-mails, and his BizzyBlog comments, MarketWatch reporter Rex Nutting has demonstrated stunning bias in assuming that the home prices are already in decline and that such a decline is an indicator that the downside of a housing bubble has commenced. Along the way, he has shown a lack of faith in the market's ability to adjust in terms of supply and demand, and has committed a factual error in reporting on home-price history that I would expect MarketWatch to correct. The thought that the business press may be dominated by reporters such as Mr. Nutting is troubling indeed.
The starting point for this post is MarketWatch reporter Rex Nutting's comment (#2) at the "Fun with Tom and Rex" BizzyBlog post on September 7. I will repeat the comment verbatim, put in the graphs Rex sent in a separate e-mail, and then respond. Though it is painful to contemplate, please remember that this guy is among the cadre we rely on to get straight business news.
Clearly, I won this "debate." Unlike Tom, I do not have my mind made up before I see the facts. Unlike Tom, I looked at the evidence and followed where it led me. Unlike Tom, I am not fixated on dictionary definitions, but on what’s happening in the real world. Unlike Tom, I can call a spade a spade. Unlike Tom, I don't see this as some sort of media or political conspiracy, where the only thing that matters is whether you’ve scored a debating point against the hated MSM or DNC.
It's not a liberal or a conservative view to see that the housing market is in a free fall. Just look at a few facts: Starts down 13% y-o-y; new home sales down 21.6%; existing home sales down 11.2%; home builders stocks down 40% y-o-y.
If Tom had had his way, I suppose we’d have seen lots of headlines in 2001 saying: The Nasdaq hasn’t been in a bubble; it’s just returning to normal!!!!
Or this one in 1638: "Don’t worry about losing your life savings!!! Tulip prices are just returning to normal!"
"Normal" can be a long ways down, my friend. A lot of money can be lost on the way to "normal."
One more thing: If home prices are now returning to "normal," what were they before? Maybe…. abnormal??
Wow. Before I cower in the corner, let's take a look at the six graphs Rex helpfully supplied to "prove" his point that we're in a housing bubble-implosion-free fall-recession-collapse (click on each graph to see a larger version):
To say that Rex doesn't get it is an understatement:
- NASDAQ graph: What does NASDAQ's meteoric rise and distastrous plunge have to do with a few years of double-digit home-price increases followed by one "back to normal" quarter (so far)? Absolutely NOTHING (except wishful thinking?).
- Building permits graph: What does the fact that building permits are falling have to do with home prices? It means that supply is adjusting to demand -- an indicator that new-home prices may hold steady. In terms of the construction industry it's not the best of news, but Nutting should know that an industry in trouble doesn't necessarily lead to price collapses. Did car prices tumble by double digits during Ford's and Chrysler's crises in the late-1970s and early 1980s? Are car prices tumbling now at double-digit rates?
- Unsold: What does the rising inventory of unsold homes mean for home prices? POSSIBLY trouble. I say "possibly" because overall national home prices have, as of June 30, NOT declined. What often happens when people can't sell their homes is that they take them off the market in favor of staying put or renting the property to someone else. Sometimes people don't get to do exactly what they want exactly when they want to do it; that's life. It remains to be seen whether the supply will be worked off that way, or will be reflected in lower prices.
- Existing home sales: What does the fact that existing home sales are falling have to do with home prices? IF the supply of available homes doesn't adjust accordingly, it COULD mean lower prices or slower increases. Based on results so far, the answer nationally has been "slower increases" and NOT lower prices. Based on the graph, if there was a strong correlation between falling sales and falling home prices, those prices would have begun to fall in the middle of 2005. But they didn't, and nationally, they haven't yet.
- Selling price increase graphs: What about the fact that the INCREASE in the median selling price of homes per the government's Office of Federal Housing Enterprise Oversight (OFHEO) dropped to 1.17% during the previous quarter, just a bit more than overall inflation (final graph), or that the Census Bureau/Haver report has prices barely increasing in the past few months (second-last graph)? In OFHEO's case, it means that home-price increases have retreated to a level that, as of the second quarter, is still above we saw during the entire decade of the 1990s! In the Census Bureau/Haver case, it may indicate a genuine decline. For what it's worth, the OFHEO data is considered more reliable, as several publications, including MarketWatch, have noted. It may or may not be a precursor of longer-term price declines; that depends on whether or not supply and demand can balance out at current prices, which, despite the hysteria, remains an open question.
Now let's get back to the comment itself. To say that it's unprofessional is to give it too much credit:
- Rex has never, in the course of all of our correspondence, done anything more than tell us that "we're in a housing recession, I just KNOW that we're in a bubble, and I just KNOW that prices are going to tumble." Again, the housing INDUSTRY may very well be in a recession, but because of supply-demand adjustment, prices haven't declined yet, may not decline at all, and may not trail or match inflation long enough to be fairly characterized as a bubble.
- Rex doesn't like the dictionary definition of a real estate bubble, so I guess he thinks he gets to define it as he sees fit. If he's going to do this, he at least needs to grant his readers who are "fixated" on the idea that words mean what the dictionary says they mean the courtesy of knowing that words mean what he, Rex Nutting, wants them to mean.
- As to "scoring debating points," and the DNC/MSM, please. This was a debate about conditions in the housing market. I don't know Rex, whether he's Democrat, Republican, or Independent. I DO know that if he thinks that, as of June 30, we were already in the downside of a housing bubble, he's ignorant, as, according to OFHEO, the real prices decreases necessary to claim that we're in one simply hadn't taken place at all, let alone for a long-enough time. I have conceded that if we have roughly 4 quarters of real declines (i.e., compared to general inflation), the CLAIM that we're in a bubble will have some credibility. But the POSSIBLE "bubble" won't even start as long as OFHEO keeps on reporting quarterly price gains that are greater than current inflation.
- His citations of sales decreases have been dealt with. Supply may or may not adjust to demand without prices going down; we don't know yet. As to homebuilder stocks going down, well, that's where the NASDAQ effect comes. The market probably got too excited about the homebuilder stocks during the boom of the past few years, so of course there's going to be an adjustment when the froth comes off. But, again, the price activity of certain stocks doesn't predict home-price declines.
- His NASDAQ analogy is, of course, incorrect. If you're going to compare NASDAQ stock prices to anything, you'd compare them to homebuilder and mortgage-company stocks, NOT the product they sell or finance. That's a pretty elementary concept. As former Internet bubble hero Webvan's stock declined from ridiculous to nothing, did the prices of the food it delivered or its other services go down? Uh, no. And Rex's rant on tulips is simply absurd, and immature to boot.
- Of course it's possible that the housing market is in for some kind of steep, long, systemic decline. I'll hold out that possibility, even though there's very little evidence, while Rex, absent relevant evidence, just KNOWS we're there already. I will say this: I don't think that there has been a double-digit year-over-year decline in national real estate prices (which I will use as a proxy for Rex's "long way down") since the Great Depression, and I don't see any reason to think one is coming. When I do, I'll let you know, because, unlike Rex, I'm not locked in to my assessment; I just do the best I can with the information available.
What we have here is someone we rely on for informed, objective, fair, and balanced business news who is showing in the comment above that he has none of those four characteristics, and that our reliance on him is misplaced.
How many other business reporters have Rex Nutting's mindset?
Wall Street Journal, 9/8/06 (free link); "Housing Slowdown Takes Its Toll Economists Say Selling Prices May Stagnate, Or Decline, in 2007 as Cool Down Continues" -- yes, there's pessimism here, but last time I checked, "may decline" does not mean "are declining."
Reuters via Money/CNN, 9/7/06; "Realtors slash home sales forecast" -- Money quote from National Association of Realtors economist: "Under these conditions, we'll probably see prices dip temporarily below year-ago levels as the market works through a build-up in housing inventory." A "temporary dip" is not a long-term decline. It's an adjustment of supply and demand.
MarketWatch, 9/7/06 (requires free registration); "Realtors expect home prices to fall" -- This one's by our good friend Rex. You can decide whether or not it has a more pessimistic tone that the WSJ piece noted above. I will note one reporting error. Rex reported that "The OFHEO index has never shown an annual decline in its 30-year history. The smallest gain ever was 1.3% in 1991." He must have been looking at a different OFHEO report, because the 1991 annual increase he cited isn't there -- it was 2.59% (PDF -- go to pages 3 and 4, quarterly; annualized, previous-four-quarter data for 1990-1999 can be found in the graphic at this previous post). Two other calendar years since 1990 have come in lower than the 1.3% Rex cited, specifically 1990 (0.26%) and 1994 (0.83%). Additionally, five other four-quarter periods not ending on December 31 came in below Rex's supposedly calendar year-based 1.3% (1991Q1, 0.62%; 1991Q2, 1.10%; 1991Q3, 0.73%; 1993Q1, 1.06%; and 1995Q1, 0.73%). I expect that MarketWatch will correct this error.
USA Today, 9/7/06; "Realtors forecast what home builders know: Home sales this year will tumble" -- "Prices are still expected to rise above last year's highs, if just barely." There is no indication of a long-term trend.
Cross-posted at BizzyBlog.com.