Wednesday, July 1, 2009

False Hope Syndrome


Two Statistics:
  • Housing Starts 70% lower than during peak of housing boom
  • Surge in Housing starts as new home builds jumps 17%
Both statistics are true. But, both give completely different interpretations. There is a 17% increase in housing starts, but given low basis, it hardly is much to get excited about.

Also note there was an increase at the start of 2009, only for housing starts to drop back again.

The moral of the story is be wary of statistics. We need to look beyond the headline statistic to understand their context and relative significance.

For example, in the UK, we have seen figures like 15% jump in mortgage lending. But, this is from a very low base. Another way of thinking about the jump is. - Despite zero interest rates, mortgage approvals still close to record lows.

After a deep recession, it is tempting to look for glimmers of hope and build them out of proportion, but, they can be misleading.

Unfortunately, recent revisions to GDP statistics suggested the downturn in the first quarter of this year was worse than expected (often revisions go the other way)

N.B. Understanding the significance, context and importance of statistics is an important skill we try to teach Economics A Level students. Another example is the difference between a fall in prices and a fall in the rate of change.

See also: Misleading economic statistics

1 comment:

paco said...

"After a deep recession, it is tempting to look for glimmers of hope and build them out of proportion, but, they can be misleading."


Hope, in the case of housing, is not more housing starts. We are so over built from the single largest housing bubble in the US that it's going to take more time to work through all the inventory we created. Hell, in Seattle where I live I still cannot afford a median priced house despite having an above median income. We need to get back to the fundamentals of housing costs vs. income. Hope is a lowering of starts, and price of housing into realistically affordable levels.

Once regular folks, and not speculators, can afford to buy homes then you can expect more housing starts. It's too expensive to build a home right now if you have to compete with all the foreclosures. It's going to be at least another year until we work through all that mess.