April, 2007

Weather...or Not

Bad winter storms and half-hearted reporting snowball into confusion over the housing market.

By Greg Brooks

The dealer was concerned and a little perplexed: Her e-mail referred to two articles on the housing market, written within a week of each other, but pointed in opposite directions.

The first appeared in an investor newsletter called Action Economics on Feb. 23. The headline read, “Housing Remains Steady Amid the Gloom” and the sub-headline told the story: “Though January housing starts were weak, other real estate indicators have bounced back from the June-August correction of last year.”

The second article appeared at CNNMoney.com on Feb. 28 under the headline, “New Home Sales Plunge.” Economists had predicted that annualized new home sales would decline about 1.8% from December to January; instead, they dropped 16.6%. But CNN offered no explanation. It simply noted that “Wednesday’s latest reading on the battered real estate market came in much weaker than forecasts,” and added a few tidbits about publicly held home builders’ lousy quarterly results.

There’s a reason why new home sales “plunged” in January: The Midwest and Northeast were up to their eyeballs in snow. What bothered the dealer who had written me was that CNN ran the numbers without investigating what might have been behind them. “Markets move on perception and the ‘plunging sales’ headlines hurt business,” she wrote.

She’s right, although there is a caveat: If the biggest financial decision you’ll ever make in your life can be influenced by people who thought the death of Anna Nicole Smith warranted weeks of coverage, it’s hardly fair to lay all the blame on them.

Just the same, it does appear that CNN could use some help writing headlines.

The market didn’t take a turn in January. It just failed to meet expectations, which is to say that a more appropriate headline might have been, “Economists Blow Housing Forecast.” Economists wouldn’t be offended—they already know they’re wrong as often as they’re right. They even have a joke about it: “If you can’t predict accurately, do it often.”

If CNN’s reporter had stopped to think about the weather, it would have been obvious why sales plunged. The term “house-hunting” takes on a different meaning when homes are buried to the eaves under snow. Apparently no one considered the possibility of snowstorms in January, which suggests another possible headline: “Economists Can’t Predict Weather, Either.”

But if nothing else, CNN could have put a positive spin on the news: “Buyer’s Market in Real Estate Gains Strength.”

That’s not what mainstream news networks do, though. I’m not saying they’re shallow; I like “nuance-averse” better.

Unfortunately, the market these days is about as nuanced as it can get. Prices are falling and that’s bad, except that it makes homes more affordable, which is good. Household income has been stagnant, which is bad, but the average household still spends less than 25% of its income on housing. That’s not as good as it was in 1993 at 19.1%, but it’s a whole lot better than the 36.4% it was at in 1981. It’s good that supply and demand are coming back into balance as inventories of unsold homes decline. But watching it happen is like watching grass grow, and builders can’t do much to speed up the process—new home sales are only about 15% of the total.

Perceptions do move markets, and this one is neither as good as the optimists say nor as bad as the pessimists say. The trouble is that the housing market can’t be explained in a 10-second sound bite. Alarming headlines grab readers and simple stories hold them, and as long as that’s the case, the news media will continue to make mountains out of molehills.

The only thing you can do about it is change the channel, but don’t do it now. There’s an Anna Nicole special on in a few minutes.