Who Knows about Home Prices?

Yesterday we noted the big play given to popular opinion about the impact of the stimulus package.  This is a typical polling question.  The issue is important, so you ask opinions whether people understand the problem or not.

Since virtually no one understands macro-economics, and many others have a political agenda, the results are skewed.  The policymaker faced with this information my face the Burkean Dilemma, described here, in choosing between what is right and what is popular.

Housing Data

We join the pack in our interest about home sales and prices.  Housing is crucial.  The economy can rebound without housing.  Those who do not think so have not analyzed the GDP figures.  Merely subtracting a decline in this anchor will yield positive GDP.  A brisk rebound requires something more.  That is why every report on home sales is interesting.

Diana Olick covers housing for CNBC.  She has been unremittingly bearish for as long as we can remember.  If she comes on at lunchtime we have a little office contest.  We pause the TIVO and speculate about what she will say if the data suggest a smidgen of optimism.

Today's Data

The big Olick story today was a survey report from Zillow.com, Homeowners More Optimistic About the Future Than Any Time in Past Year.   The article describes a survey with Harris Interactive, analyzing homeowner perceptions.  (We did not see a methodology link, and we did not analyze the confidence interval or other elements of the study.  These private surveys get less critical treatment than government data like the payroll employment survey.)

Olick's take, reported repeatedly by video and on her blog, was that the homeowners were "deluded."  Without a link to Zillow or any other authority, she offers the following conclusion:

A new report from Zillow.com finds that 60 percent of homeowners surveyed believe their home lost value in the past twelve months.  In reality, 83 percent of all homes lost value.  Owners in the South were the most deluded and those in the West, understandably, were the least.  And to make matters worse, 81 percent of all homeowners surveyed actually believe their home value will not fall over the next six months; this as foreclosure numbers rise and all of the action in the housing market continues on the lowest of the low end.  I have not found one expert (and I know I will as soon as I write this) who claims that home prices have hit bottom.  Sales, perhaps, but not prices.

A Few Suggestions

Diana Olick has been a popular and influential source on housing.  She is very intelligent and very effective in her presentation.  Her approach has been helpful to many during the housing decline.  Part of the way she connects is by viewing housing in "point estimate" terms.  She treats the entire supply and demand curves in terms of the marginal buyer or seller.  This means that she simplifies an entire market distribution by talking about a single buyer or seller.  This makes it easier for the average viewer to understand.  It also reduces accuracy.

Here are a few suggestions.  These are also useful for anyone following housing.

• Homeowners know something about local values.  While Olick sees survey respondents as deluded, that is an opinion based upon the aggregate information.  People who are actually thinking about selling are actively reviewing local market prices.  Many parts of the country are not following the excessive pattern of Florida, Nevada, California, and Arizona.  It is time to make distinctions.
• Markets clear.  There is a current clearing price reflecting supply and demand curves.  It shows the current prices of willing buyers and sellers.  Markets always clear.
• Do not lecture.  Some sellers are not willing to sell at current prices.  That does not mean that they are deluded or even wrong.  As a comparison, there is a price where we might sell current stock holdings, like Caterpillar (CAT).   Holding out for a price does not necessarily mean that we are delusional.  It means that we have a different value metric.  That is why there is a curve for supply and demand.  It is completely normal for people to offer holdings at differing prices.
• Shadow pricing works both ways.  There is plenty of commentary about shadow supply -- people that will offer houses if prices firm up.  There is little commentary about shadow demand -- those who want to have their own home, but expect lower prices.  It works both ways.  As credit conditions improve, more buyers will qualify.  The possible extension of tax credits for new home buyers is one key factor.

Our Take

We are especially surprised that public opinion is embraced on subjects like whether the stimulus plan is working, and disparaged on housing.  In the former case, as we noted here, people need to understand macroeconomics and the counterfactual.  They are ill-prepared for either.

When it comes to housing, people need only to follow sales in their neighborhood.  Those without an immediate selling interest may not follow the market closely, so their poll responses might be unrealistic.  Those who are motivated sellers are well aware of current trends.  They are much better with their opinions about home values than they are on macro-economic issues.

Poll data should be interpreted with the information and analytical questions in mind.

Comments

[tradeking13]

Watch the show "Real Estate Intervention" on HGTV and you'll see how deluded some people are.