Houses are not canned tuna. Remember that when reading about housing prices.
Many are nervous about the housing sector right now. Every number announced is analyzed to death.
Read such analyses with a grain of salt, particularly when they reach conclusions about house prices.
Houses are not a standardized product that is comparable across space and time like tuna.
Therefore, be extremely careful in drawing conclusions from reported short-term price changes.
Tuna always is in the “market basket” of goods and services whose prices into the monthly Consumer Price Index. Myriad households across regions and ethnic backgrounds buy it, and have for years.
It is a very specific product. If the Bureau of Labor Statistics checks the price of a 6 oz. can of “Chicken of the Sea chunk light tuna in water” in hundreds of stores in June, it surely will find the same product in July. To consumers, a can in 2007 is the same as in 1987 or 1967.
That is not true of houses.
A North Dakota house is very different from one of the same square footage in Texas, Alaska or New Jersey. Some houses have basements, other don’t. Some are well insulated, others not. Some have stucco exteriors and tile roofs.
Others have vinyl siding and asphalt shingles. Some have double-pane casement windows and other have single-pane jalousies. Some are on acre lots and others shoehorned onto 4,000 square feet.
They are not a uniform product.
There is another difference. The tuna produced each year equals the amount sold and eaten. But the houses built in a year are a small percentage of all houses people use. All houses sold in a year – used and new – are more numerous, but still a small fraction of our total housing stock.
We don’t use the price of something we can measure precisely, like tuna fish, to appraise large stocks of fish in people’s pantries. But some analysts do infer values for millions of houses from the sale of a few hundred thousand.
Be careful when reading such conclusions. The set of houses that is sold in any month is not a representative random sample of all houses. Nor is it necessarily a set that is comparable to those sold six months or a year earlier.
Those people who choose to sell houses in a rising market may differ from those who sell on a falling market. Their houses differ too. Houses put on the market – and the prices they sell for – when subprime lending is contracting are different from when it was expanding.
This is not to say that information on the median sale prices of homes sold compiled by realtors or others is useless.
Taken judiciously with other data, including what the Census Bureau tabulates on housing permits, starts and completions, median sale prices shed light on the housing sector.
But this information is not as reliable as that for canned goods in the CPI. Draw conclusions very carefully.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.