Saturday, December 10, 2005

When did reporters become the gullible stenographers of frauds?

Holy smokes!

The Phoenix region has landed on a list of "extremely" overvalued housing markets

But, but but! Of course there's a "but":

but it's unlikely that the situation will lead to meaningful drops in home prices, several local housing analysts said.

Whew! That was a close one!

Well, not really. The cited text comes from the Arizona Republic, reporting alarmist predictions that are based on no actual, on-the-ground experience that I can detect. The 'researchers,' "Global Insight and National City Corp., a Cleveland-based mortgage lender," couch everything they dare to say in the most mealy-mouthed possible language, for that simple reason that any long-range prediction about a particular real estate market is inherently suspect. Our Cleveland mortgage lenders only dare to make mealy-mouth predictions for--wait for it--"299 metro areas."

When did reporters forget how to make the Bronx Cheer? Isn't that what Hildy Johnson used to do, in The Front Page, when fed a line of bull?

Here's a better question. Assuming the absolute mealy-mouthed worst for the Phoenix market, how bad will things get?

"[W]hen you look back at markets that have declined 10 percent or more over two years, those markets were overvalued by that much or more[.]"

That's choice. What it almost says is that the Valley might be at risk of losing 10% of the current market value of homes over the next two years. That is to say, the house that was worth $145,000 in December of 2003, which is now worth $265,000, may only be worth $238,500 in December of 2007. I'll take bets against that outcome at $100 a head, down to my last dollar. But, even conceding the (unmade) point, the four-year appreciation on the home would be 64%, $93,500 in unearned increment--wealth accrued without having to be produced.

But what the quotation actually says is this: If it turns out that homes have lost 10% of their value over two years, it's because they had been overvalued by 10% or more. Translated into English, it's just stupid. It sounds tautological, but it isn't, actually, because it introduces a false idea of causation.

The value of a thing is what that thing will bring. If people in Phoenix value beer more in Summer than in Winter (they do, by a lot), this doesn't mean the beer was somehow over- or under-valued, in means the value of the beer changes in the subjective evaluation of the buyer depending on the weather. If people in some future time offer less for comparable homes than they had in the past, this doesn't mean they had been over-valued in the past. It simply means they are less highly prized in the subjective evaluation of the buyer at that future time. The only commodity that can be said to be "over-valued" is the one that didn't sell.

There is actually nothing in the article that says Valley home values are going to drop, nor any indication of why they should, could or even might. To his credit, the reporter goes to R. L. Brown and Elliott Pollack for arguments why prices probably will not go down.

He doesn't mention the monthly results reported this week for Las Vegas, a useful leading indicator for Phoenix real estate results. Las Vegas is very similar to Phoenix, a high-growth city which has also undergone a sustained appreciation boom. Like Phoenix, Las Vegas suffered a very small decline in median values in October. For November, Las Vegas home prices were up slightly. We haven't yet seen November's overall median results for the Phoenix market, but the BloodhoundRealty.com Market-Basket of Homes shows a small increase in values among the subset of Valley homes it tracks.

When did reporters stop vetting the claims made by the sources of their stories? Maybe they never did. Maybe that's just a romantic illusion we got from the movies. Maybe they've always been the doe-eyed stenographers of charlatans and mountebanks, dutifully transcribing the absurd.

In any case, my favorite version of the make-a-scary-prediction-get-a-headline scam comes from KPHO Phoenix Channel 5 News in August:

Schiller predicts housing prices could fall as much as forty percent over the next generation, triggering a recession.

"Generation" is a nebulous term. At a minimum, it indicates the span of time necessary for infants to become parents, call it 20 years. A recession--a nationwide failure of the central banking system--runs 18 months peak to valley and 36 months peak to peak. So prices are going to decline by as much as 40% (a quantification that includes 0% and +200%) over the next 20 years, which could trigger a recession, although we may have to root around to find it somewhere in that 20-year span of time.

How can anyone hear such a blast of flatulence and not say, "Hold on a second there, Perfesser. Are you saying that the population of Phoenix or the United States or the Earth is going to decline? Or are you saying that people are going to start living outdoors? Or is your claim simply that the supply of housing is somehow going to massively and permanently increase by around 40%, abating demand by the same amount? Is there any basis in factual reality whatever for making such an absurd and seemingly undefended claim?"

You can see me asking the same sort of questions of Dr. Jay Butler, who in fact may not be pulling his best headline-grabbing claims out of thin air. But he has not yet responded to my questions--nor, to my knowledge, has anyone else pressed him for the underlying data behind his wilder statements.

While I wait--cum taces, clamas--I have one last question about the state of affairs in Valley real estate journalism:

Where, oh where, is Hildy Johnson when we need him?

posted by Greg Swann
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Yes Greg, where is the media to call a shill a shill?