Be Careful Drawing Conclusions About Home Prices

Houses are not canned tuna.

Remember that, urges a notable instructor an economist, when reading about the recent changes in home prices.

Many are quite nervous about the housing sector right now, Edward Lotterman correctly observes. Every number announced is analyzed to death.

But read such analyses with a grain of salt, particularly when they reach conclusions about home prices.

Houses are not a standardized product that can be measured in terms of comparable sales across space and time like tuna.

Therefore, a buyer or seller should be extremely careful in drawing conclusions from reported short-term price changes.

Canned tuna always is in the “market basket” of goods and services whose prices figure into the monthly Consumer Price Index.

Myriad households across regions and ethnic backgrounds buy it, and have for years. It is a very specific product.

If the Bureau of Labor Statistics checks the price of a 6 ounce can of “Chicken of the Sea chunk light tuna in water” in hundreds of stores in June 2007, it surely will find the same product in July.

To consumers, a can in 2007 is the same as in 1987 or 1967.

That is not true of houses, and certainly not of the mortgage loans used by millions to secure their piece of the vaunted American dream.

A house in the Idaho housing market is very different from one of the same square footage in Texas, Alaska or New Jersey. Some houses have basements, other don’t. Some are well insulated, others not.

Some have stucco exteriors and tile roofs.

Others have vinyl siding and asphalt shingles. Some have double-pane casement windows and others have single-pane jalousies. Some are on acre lots and others shoehorned onto 4,000 square feet. They are not a uniform product.

There is another difference. The tuna produced each year equals the amount sold and eaten. But the new houses built in a year are a small percentage of all houses people use. All houses sold in a year — used and new — are more numerous, but still a small fraction of our total stock.

We don’t use the price of something we can measure precisely, like tuna, to take stock of large stocks of fish in people’s pantries.

But some analysts do exactly that when they infer values for the housing market - many millions of homes - from the sale of a few hundred thousand.

Be careful, prospective home loan applicants, when reading and arriving at such conclusions.

The set of houses that is sold in any month is not a representative random sample of all houses. Nor is it necessarily a set that is comparable to those sold six months or a year earlier.

Those people who choose to sell houses in a rising market may differ from those who sell on a falling market. Their houses differ too.

Houses put on the market — and the prices they sell for — when bad credit mortgage lending is contracting are different from when it was expanding.

This is not to say that information on the median sale prices of homes sold compiled by Realtors’ associations or others is useless.

Taken judiciously with other data, including what the government tabulates on housing permits, housing starts and completions, median sale prices shed light on the real estate sector. But this information is not as reliable as that for canned goods in the CPI. Draw conclusions very carefully.

SOURCE: Idaho Statesman