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SUBPRIME COMMENTARY: DON���T RAISE THE BRIDGE, LOWER THE WATER CREDIT SCORES ON THE RISE By Mark Lieberman, Economist for the Five Star Institute Two housing reports published in the last week of January demonstrated, yet again, that economists are not infallible. On January 22, the National Association of Realtors (NAR) reported existing-home sales for December: 4.94 million against a consensus forecast of 5.1 million. The forecast would have represented an increase of 1.2 percent over the previous month���s 5.04 million sales pace (these data are reported as a seasonally adjusted annual rate). Instead, the report showed a drop of 1 percent from the revised November sales rate of 4.99 million and an almost 2 percent drop from the originally reported rate for November. Then on January 25, the Census Bureau and HUD reported jointly 369,000 new homes were sold in December compared with a consensus forecast of 388,000. The forecast would have represented an increase of almost 3 percent from the 377,000 November sales pace. Instead, the forecast was a drop of 2.5 percent from revised November sales of 398,000. The actual sales report for December signaled a 7.3 percent decline from the month before. If your head is spinning from the numbers, wait���there���s more. Economists of all stripes will insist their forecasts for both existing and new home sales are correct. We shouldn���t���according to one school of thought���be looking at one month���s dataset but rather quarterly numbers, although home sales measurements are reported, and forecasted, monthly. The two home ���sales��� reports calculate different activity���the new home sales report measures contracts, the existing-home sales report measures closings, and neither is a perfect gauge of the housing market. Indeed, according to the CensusHUD joint release, the new home sales report is ���estimated from sampling surveys ��� subject to sampling variability as well as nonsampling error including bias and variance from response, nonreporting, and undercoverage.��� The release includes a percentage range. In the case of the December 2012 report, the 7.3 percent drop in sales could have been plus or minus 15.3 percent: anywhere from down 22.6 percent to up 8 percent. ���If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant��� that is, it is uncertain whether there was an increase or a decrease.��� In other words, sales may have gone down, they may have gone up, but we really don���t know. The NAR report contains no such disclaimer, but rather than focusing on the month-month change when the change is negative, NAR highlights the year-year change as it did in its December report. If NAR had indeed looked at quarterly numbers, it would have seen that fourth-quarter sales averaged a 4.9 million sales pace per month compared with 4.7 million in the third quarter and 4.4 million in the fourth quarter of 2011. NAR is, of course, an advocacy group trying to put housing in the best possible light. We have a right to have different expectations from a government report. NAR also stresses the year-year rather than month-month change in the median sales price. The month-month change in the sales price would logically affect sales. During 2012, sales dropped month-month five times and in four of those months the median price rose; the median price fell in four of the six months in which sales increased (sales were unchanged in May). While the median price moves not only on supply and demand, but also on the mix of homes sold in a given month, to suggest there is no or limited correlation between prices and the number of homes sold would be unrealistic. The cautionary tale is to watch not only what the numbers are, but also what analysts say they are. Mark Lieberman can be heard every Friday on P.O.T.U.S. (Politics of the United States), SiriusXM 124, at 6:40 a.m. and again at 9:40 a.m. EST. VERBOSITY ���Housing has to lead the economic growth from here on. The U.S. economy is running out of all other engines of growth but housing. [C]onsumers are tapped out ��� while corporations are overly cautious. True housing demand will come when new jobs are created and real wages rise.��� ���Ron D���Vari, CEO and Co-Founder of NewOak Capital Advisors 38 Subprime credit scores are rising across the country with pronounced reductions in the number of subprime borrowers in several rebounding markets, according to the credit reporting agency Equifax. ���Consumer credit scores are improving in most major metropolitan areas,��� commented Trey Loughran, president of personal solutions at Equifax. Designating credit scores below 620 as ���subprime,��� Equifax found the number of subprime borrowers decreased 2.1 percent from the third quarter of 2011 to the third quarter of 2012. That 2.1 percent translates to about 1 million homeowners who rose from the subprime category. ���We are seeing a trend of consumers being careful and disciplined about their use of existing credit while also being cautious about using new accounts they have opened,��� Loughran said. Equifax observed the greatest improvements in markets where employment rates are strengthening. Population shifts are also impacting some markets, according to Equifax. The credit bureau also found that ���early housing-bust markets��� are experiencing improving credit scores as time passes since the worst of the foreclosure crisis. These markets include San Francisco, Sacramento, San Diego, Los Angeles, Las Vegas, Phoenix, and Miami. The number of subprime borrowers in San Francisco fell 6.4 percent. In Sacramento, the number declined by 6.2 percent. San Diego and Los Angeles experienced identical declines of about 5.3 percent. Of the 25 metro areas Equifax measured, Chicago experienced the greatest decrease in subprime borrowers���about 9 percent. Chicago���s rising employment rate is one major factor contributing to this decline. The only metro in Equifax���s study to experience an increase in the number of subprime credit scores was Houston. However, when population growth is taken into account, it is evident credit scores in Houston are improving as well. The percentage of subprime creditors in Houston declined 0.5 percent from the third quarter of 2011 to the third quarter of 2012. KNOW THIS Middle market firms���those with revenue between $10 million and $1 billion���added 1.17 million jobs in 2012, according to the National Center for the Middle Market.

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