Special Report: Housing Market Decline Worse Than Data Indicates


The average American has no idea how precipitous the national housing decline really is because the true depth of the problem is being obscured by a widespread sin of statistical omission.

Several key economic indicators for housing are not adjusted for population growth. That means we’re comparing the number of home purchases made by our current national population of more than 312 million with purchase activity that dates back to 1959 in some cases, when there were only 177 million Americans.

The difference is roughly equal to the population of Japan.

For example, once the housing activity data for May is adjusted for population, the drop in housing activity since 2000 widens to 16 percent from 7 percent for existing home sales and to 67 percent from 64 percent for new home sales. The drop in housing starts, a measure of new residential construction, steepens to 68 percent from 64 percent.

Those disparities represent the difference between straight sales and sales-per-million Americans for new home sales and existing home sales, and the difference between straight starts and starts-per-million Americans for housing starts.

reaser“Adjusting housing stats for population would provide a very useful perspective that we have not seen in housing stories and need to see,” said Lynn Reaser, chief economist for Point Loma Nazarene University at the Fermanian Business & Economic Insitute. “It’s another element to help people understand what’s going on in the housing market and one that would highlight how traumatic the downturn has been.” 

Reaser previously worked as chief economist at Bank of America’s Investment Strategies Group. 

The disparity is no surprise to most economists, like Reaser, but it is a surprise for the rest of us. That’s because most of our economic news comes from media organizations that tend to regurgitate government press releases written for economists without adjusting that information to the general audience they’re supposed to be serving.

The result can be economic coverage that confuses Americans without formal financial education.

For example, the National Association of Realtors reported homeownera seasonally adjusted annual pace of 4.81 million existing home sales in May, which is how monthly purchases are calculated. They adjusted the 458,000 sales that actually occurred o eliminate predictable seasonal variations, like the decrease in sales that occurs each winter due to poor weather and the increase each summer, and multiplied the resulting number by 12 to produce an annual rate for comparison to previous years.

Such games serve financial professionals, while simultaneously misleading average readers.

The NAR never adjusts its data for population growth. Without that adjustment the data understates the severity of the current downturn.

The same is true of federal housing data.

We adjusted existing home sales for population by using federal population figures to calculate existing home sales per-million Americans. The result was a reading of 15,391 existing home sales-per-million Americans in May, compared with 18,320 in 2000.

We followed the sswonkame path for the new homes sales data released by the U.S. Department of Commerce, which reported a seasonally adjusted annual sales pace of 319,000 units in May. That equates to 1,021 new home sales-per-million Americans. A far cry from the 3,105 new home sales-per-million Americans in 2000.

“Adjusting for population would get closer to the mark on a lot of statistics on the economy today,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.

So, why not do it?

Well, part of the answer is that trained economists and financial professionals are supposed to be the core audience for the government’s economic indicators. Most already understand the role a growing population plays in those results.

However, the indicator stories are now being read by a general audience. Its less savvy members are often frustrated by the gap between their personal economic situations and those reported by financial news organization.

The other part of the answer is that the housing industry has become so infected with the idea that optimistic news coverage breeds stronger sales that it’s almost institutionally incapable of telling the truth right now. Or stepping forward to lobby for more accurate data on housing activity.

The result is a housing industry which still fails to understand that its biggesforeclosuret challenge is not the weak economy, but its own credulous reputation.

Consumers just don’t trust housing professionals as they once did in an industry that’s tarnished its own reputation by misrepresenting the quality of mortgage backed securities and engaging in predatory lending, inflated appraisals, and the recent foreclosure scandal.

Bank of America made headlines in June as it neared agreement with powerful investors that features a record $8.5 billion settlement for its role in the mortgage backed securities deception.

Against this backdrop of industry misconduct, the average American is more than three times as likely to have been a victim of violent crime during the past year than to have purchased a newly built home.

“The horrendous decline in the housing market has been difficult for the majority of homeowners to grapple with,” said Ellen Beeson Zentner, senior U.S. Macro Economist at Bank of Tokyo-Mitsubishi UFJ. “That the official government statistics might be masking the depth of the decline just inserts yet another burr under the saddle, and highlights the fact that it may take a decade for homeownership to look attractive again.”

At the height of his power as head of the Federal Reserve, Alan GZentnerreenspan once said that markets should be allowed to police fraud, without the interference of regulators. That’s a fancy way of saying that once enough consumers are crushed by a dishonest salesperson, company or industry, other will learn to avoid those predators. Much as consumers have turned their back on housing.

That’s also one of the reasons we’re looking at a future now in which many Americans prefer to rent than own. The homeownership part of the American dream is dead to them.

“If you adjust for population then the downturn in the housing market is even worse,” said Patrick Newport, an economist for the research firm IHS Global Insight.

John Silvia, chief economist for Wells Fargo and former chief economist for the Senate Banking Committee, says the U.S. is no longer building enough homes to accommodate future generations because of the lack of demand. The true scope of the problem is being obscured by the failure to adjust housing data for population.

Silvia’s Silviateam estimates construction must start on 1.2 million new homes each year just to keep pace with household formation due to population growth. That’s 3,859 starts per million Americans, more than twice the current rate.

The problem of inflated statistics isn’t limited to the housing sector, according to Silvia. Other economic indicators could also be more accurate if they were adjusted for population growth, he said.

“There is a problem with several (data) series,” Silvia said. “We could also review GDP per capita and get a different look at the broad economy as well. Once viewed in the context of per capita numbers many series give off a very different view of the economy.”