Lies, Damn Lies and Statistics

Mark Twain had a way with words and humor, the title is a quote of his.

Lately we have been watching the real estate collapse and things are not as they appear. A lot of us have been following Bubble Markets Inventory Tracker with baited breath. The numbers don’t seem to support the collapse or do they?

One item not really examined for its full import is REO’s (real estate acquired by a bank through foreclosure). When we look at the statistic for homes sold during the month, we make the assumption that these people are new buyers. In a collapsing market this is not a valid assumption. The lender acquiring an REO on the court house steps is considered a “new buyer”. Their bid is the value of the first trust deed (we know the second is toast). So if they held a 100% loan for $800,000 on the house and its now valued at $600,000, there will be no bids to buy the house at the Trustee Sale. Notice what happens here. This house will be listed in the statistics as a new sale at the loan discharge price of 800K.

Let’s pick the San Diego area. December sales were 3,613 units. Realty Trac showed and increase of REO's for the month of about 500 units (I could be off a bit on this, up or down, I wasn’t writing the figures down until now). So instead of 3,613 sales, subtract the REO’s and we have 3,113 sales.

Now if you have followed this far, notice that with the REO’s, the sales price is not determined by present perceive value, but rather by the amount owed the lender. There is no one waiting in line to buy the house, the sale will take place. The lender gets it for the amount due on the note, and the sales price gets recorded. The price has no relationship to current market sales data.

Common sense says that the median price should rise with this sort of book keeping and yet the San Diego Union Tribune today announced that the median housing values had dropped $20,000. The only conclusion to come to here is that the drop could be a tad bit more than stated with all of the "Creative Bean Counting."

Let’s take the worst case scenario. San Diego has run out of "Loons" wanting to buy houses. Let’s say that we have 3,000 foreclosures in the month. This would be counted as 3,000 sales at pre 2007 prices (full retail less the second trust deed). The statistics would indicate that its time to buy into this "Rising Market." I think that Mark Twain was right. Statistics can distort reality, Caveat Emptor.