Statistics: Do you even know what you’re saying?!
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Viewpoint 03/17/2010
Statistics: Do you even know what you’re saying?!
“Sales prices are up 3%.” “Foreclosures are up 17%.” “The median sales price was X, up 3% from last year.” Do you even know what you’re saying?!
Long time readers will know I have a pet peeve about the media’s use of statistics, specifically about quoting a number or percentage without any reference to what is being compared or what it means. I wrote a series of articles a couple years ago on the topic, and they still apply today. (They can get a little dry; I claim hold-harmless if you click through and fall asleep.)
In this issue
Captown – a fictional city’s example
Current Headlines, exposed – what they say & what they mean
Future Headlines and Soundbites
Does Warren Buffett read my Viewpoint?
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Captown
Captown is a small, fictional city with an economy very dependent on the local bottlecap manufacturing plant. Sales have been on a downward slide for several years, and folks are getting nervous about the plant’s (and the city’s) future. Because of this, the local media is very quick to report on what’s happening at the plant. This morning, in fact, all 4 major networks and the local paper lead with stories about last month’s sales numbers:
Channel 4: “Good news at Bottlecap Inc, as sales were up last month.”
Channel 6: “March sales numbers are in for Bottlecap Inc, and it looks like more bad news as sales are down over 2% from this month last year.”
Channel 7: “We may have turned the economic corner as Bottlecap’s sales were up again this month – the first time in years we’ve seen two positive months in a row.”
Channel 11: “March sales numbers are in, and Bottlecap Inc posted another record-low quarter.”
Captown Gazette: “They’ve been trending pretty much sideways for most of the last year, although they’re still at sales levels from the 1990s and down almost 50% from the highs of a few years ago.”
Who’s right, you ask? All of them! But your mood and emotional state will depend on which story you saw.
Here are the annual sales results for Bottlecap, Inc. for the last decade:
Here are the actual numbers.
In more detail, here are the monthly sales results over the same time period:
Here are the monthly numbers over the last couple of years:
Looking at the the chart over the last decade, they obviously had a tremendous run-up in bottlecap sales during the first half of the decade before a precipitous fall-off in the second half of 2008, back to numbers which had been consistently “normal” 10 years earlier.
So what do the numbers really mean? We don’t know.
We don’t have enough information to make predictions about the company’s future, or the economic impact on the city.
Forecasts about the future need to be based on additional, external information.
* Has there been a nation-wide shift away from bottles?
* Is there more competition than before? Are we importing bottlecaps from a global competitor at half the price?
* Was the run-up based on distributors’ buying excess inventory on fears of a price increase, and now they’ve used the inventory and things are back to normal?
* Was the run-up based on production for a non-traditional use of bottlecaps, such as kids’ game pieces, and now maybe the game-piece fad is over?
Bottom line is one stat, or even one set of numbers, is not enough to tell the whole story – let alone to make predictions about future trends. Yet we see shim-sham headlines like these almost everyday in real life…
Current Headlines, exposed.
Housing Starts in U.S. declined 5.9% (Yesterday on AZCentral.com)
Other numbers in the article:
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Builders broke ground (housing starts) on 575,000 homes last month (annualized rate).
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January’s number was 611,000.
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71 economists had forecasts ranging from 510,000 to 610,000, with the median being 570,000.
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New Home construction rose 0.2% compared with the same month last year.
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Construction on Single Family houses dropped 0.6%.
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Building permits decreased 1.6% after a 4.7% decrease in January.
What story is the author telling us? Nothing. Nada. Zip. They basically pulled some numbers reported from the Commerce Department reports and built a nice big headline around them. We’ve been left to our own devices to figure out what the numbers are actually telling us.
Housing price recovery hits new milestone (Feb 25 on AZCentral.com)
Reading deeper into the story we learn a few tidbits:
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Prices are being compared with the same month last year. For example, Feb ‘10 compared with Feb ‘09, etc.
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In this manner of comparison, prices are still falling. The new milestone is the rate of decline is now in the single digits, rather than the double digits it’s been over the last year.
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The actual numbers were –9% in January, –13% in December, and –17% in November.
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The author does offer a quote from an economist who expects the number to reach zero this spring, which means prices are no longer falling year over year. He also says we may have reached the zero point for foreclosure sales.
Although the author tries to give us an opinion/forecast, it’s an awfully dubious headline. (In fact, it’s a headline designed more to sell newspapers and generate clicks rather than to inform or preface the article.)
Homebuilder Sentiment Index falls in March (Mar 16 on USAToday.com)
The author lets us know the recent harsh winter weather has had an effect on the builders’ expectations, but then buries us with an avalanche of seemingly random and contradictory numbers:
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The Housing Market Index (homebuilders’ confidence level) slipped to 15, which equals January’s level. Anything below 50 is considered pessimistic.
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The index was last above 50 in April, 2006
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Sales of newly built homes plunged 11% to a record low in January.
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Sales of previously occupied homes tumbled 7% – the sharpest drop since June.
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In regions outside the winter blast, homebuilders continue to struggle with competition from foreclosures.
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High unemployment and tighter mortgage-lending standards are also keeping buyers out of the market.
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Several of the industry’s largest companies are buying land and ramping up construction.
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We do expect a 25% improvement in 2010 over 2009.
What? Another story without direction. Is the market getting worse, or is it going to get better? They’ve listed several contradictions without any further details or explanations.
I’m not saying every story has to be a forecast, or even an opinion piece. But if the reporters are going to list a bunch of statistics, do a little extra research to put them in context and tell me what they actually mean.
Future Headlines and Sound-bites
There are several issues out there right now which we’re going to hear a lot about this year. Employment (or unemployment), Bank REOs (foreclosures, shadow inventory, short sales), Interest Rates (FED’s rate, support via buying bonds), Federal Income Tax credit, Budget woes and spending cuts, etc., etc., etc.
Unfortunately, we’ll see precious few detailed reports about what is being reported. And we’ll see even fewer well-reasoned forecasts – either for what we can expect to see or for what the reported number means to us in the future. Instead we’ll see plenty of half-baked reports which merely parrot some other report after sensationalizing the headline.
I’d like to encourage you, my smart reader, to think about the statistics being reported to you.
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What does that number really mean to you, and to our community? Can you convert the percentage into a number, or the number into a percentage, to see whether it’s a significant number at all?
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How does that number compare with the recent trend?
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What does that number represent? The country, state, county, city, zip code, neighborhood, or subdivision? Chances are good they’ll all have their own number which is different from what is being reported.
From what I’ve been seeing lately, there’s a good chance that if you dig a little deeper you’ll be able to find not only is the headline being reported not the whole story, it’s often just plain wrong.
Does Warren Buffett read my Viewpoint?
A forecast is basically an educated guess, and the more educated you can be in your assumptions the better the guess usually is. When I make a forecast I try to walk through a series of potential dominos – if A happens then B will likely happen, if B happens, then C should happen too, etc. Eventually you get through a series of dominos and the final forecast is clearly revealed.
The trouble is not all the variables are clearly identified, or clearly inter-connected. Some variables show up unannounced. And others don’t behave the way you expect them to.
But as long as I take the time to show you the variables I’m using and explain my reasoning, you can make an educated decision of your own regarding my forecast. You might agree that it makes sense. Or you might find fault with my reasoning and therefore know my forecast will be wrong. And yes, I’ve been wrong plenty of times.
A few months ago, back around Thanksgiving, I wrote the 2010 recovery has been postponed, in which I said we can expect to see a recovery begin, in earnest, in the 2nd half of 2011. We won’t know how accurate my forecast is for another couple of years, but I was pretty happy to see Warren Buffett make the exact same forecast last month. Now I really like my odds!
Buffett has been accumulating positions at today’s depressed prices in real estate companies and other companies which stand to benefit from a real estate recovery. In his annual report he says, “When it’s raining gold, reach for a bucket, not a thimble.”
I hope you enjoyed this e-newsletter and found something of value you can take away from it. You can leave a comment on something you read or add to the discussion by clicking here and using the comment form at the bottom of the page.
And as much as I’d love to see it raining gold, I’d probably be the guy who goes outside without a helmet & ends up with a concussion! sigh.
Chris Butterworth
Chris & Heather, The Phoenix Agents
at Thompson’s Realty
http://thephoenixagents.com
623-570-9940
Chris Butterworth and Heather Barr are The Phoenix Agents at Thompson’s Realty. The Phoenix Agents are Realtors in the Greater Phoenix area, who have built a loyal following over the years by offering superior service levels coupled with a low-pressure approach. You can visit http://ThePhoenixAgents.com online to learn more about Chris, Heather, and the Phoenix-area real estate market. If you have real estate questions or needs, please contact us anytime; we’d love to hear from you.
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