The Wall Street Journal Gets House Price Trend Wrong – Interprets Case-Shiller Data Incorrectly

Thursday, April 29, 2010

It happens. Reporters, because they cannot be financial experts in all fields, take a press release and misinterpret the data. However, the problem this time is serious because:

  1. House prices are an important, sensitive indicator to investors
  2. The data misuse gives an exact opposite conclusion to what is actually happening
  3. There is no excuse for getting the story wrong – the source (S&P/Case-Shiller) provided the proper data and analytical guidance

Here is what happened.

S&P/Case-Shiller, the best source for determining house price trends, released its latest report on Tuesday, April 27. The data is through February.

House prices have a pronounced seasonal pattern (stronger sales and prices during the late spring/summer/early fall period; weaker sales and prices during the late fall/winter/early spring period). Therefore, month-to-month comparisons of the raw data can be misleading. There are two methods for properly evaluating the information:

  1. Use 12-month changes that compare similar months, thereby removing the intervening months’ movements (S&P/Case-Shiller has tended to focus on this approach)
  2. Make seasonal adjustments based on how the monthly prices tend to cycle during a year (S&P/Case-Shiller provides such data)

Now we can look at what The Wall Street Journal did. It used the raw, unadjusted data, to create a negative headline: “Home Prices Still Pressured – Foreclosures, High Inventories Weigh on Market” (The Wall Street Journal, by Sudeep Reddy, April 28).  Here is the lead paragraph:

U.S. home prices slipped for the fifth straight month in February as many markets remained under pressure from foreclosures and high inventories.”

That headline and paragraph are dead wrong. Worse, to me, the reporter had to knowingly pick up the wrong data. In the press release, a table containing both non-seasonally-adjusted and seasonally-adjusted data is preceded by this guidance: “For analytical purposes, Standard & Poor’s does publish a seasonally adjusted data set….” The only reason for using the unadjusted data is to get a titillating, albeit erroneous, picture.

In the graphs below, you can see what has actually been happening through February.

Note: Seasonal adjustment is not precise. A month (e.g., February of this year) can see unusual weather conditions that can shift the readings more or less than normal. For that reason, looking at the overall trend of the monthly numbers, along with the 12-month changes, is the best approach to understanding what is really happening.

Note: I know the label, “improving,” on negative numbers can look illogical. If the readings are negative, they’re bad – correct? Well, if the negative numbers are getting smaller, conditions actually are getting better – hence, improving. Perhaps an example will help. If someone has a temperature of 103 degrees, we would certainly say they’re sick. If the next reading is 101 degrees, we would still say they are sick, but we would also say they are getting better – i.e., improving. The same evaluation applies to sick economic and financial numbers. Less bad = improving.

So… Ignore The Wall Street Journal article. House prices (and the other indicators I have discussed earlier) continue to improve. A second takeaway from this incident: continue to question everything, regardless of the source.

For more analysis of the trends, see my Housing and Homebuilding write-ups.

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April 2010