Saturday, March 01, 2008

More Economic Scare News

MoneyNews tells us that “the number of homes facing foreclosure jumped 57 percent in January compared to a year ago, with lenders increasingly forced to take possession of homes they couldn't unload at auctions, a mortgage research firm said Monday.” The story went on to cite some figures, such as that “233,001 homes received at least one notice from lenders last month related to overdue payments, compared with 148,425 a year earlier,” and then noted that “the worsening situation came despite ongoing efforts by lenders to help borrowers manage their payments by modifying loan terms, working out long-term repayment plans and other actions.”

Oh … my … God! Take cover; the sky is falling!

However, you can be easily misled by looking at percentages in the absence of data describing the whole universe under discussion. For example, if I told you that it has been discovered that cases of instant stupidity in the US rose 75 percent last month, you might be scared to death. But if you knew that whereas in January there were four cases, and in February that rose to seven cases, you might be comforted, knowing that instant stupidity isn’t an epidemic. (Other types of stupidity, on the other hand, may be at true epidemic levels.)

Later, the story gives you some important information, almost as an afterthought: “The U.S. foreclosure rate last month was one filing for every 534 homes.” Let’s see, if we divide that one home by the other side of the ratio, we find that the percentage of home foreclosures is a frightening .00187, less than 2/100ths of one percent. Sorry all you gloom-and-doomers, like Senators Clinton and Obama who would benefit from a true housing crisis or a recession, it just ain’t happening.

What’s missing in all of this is the very data we need on the total number of mortgages so that shows we can see just how small the problem really is. MortgageNewsDaily tells us that there are roughly 41.3 million mortgages, the vast majority of which are in the prime mortgage sector (31.4 million), a relative few (4.3 million) are government loans, and only slightly more (5.6 million) in the troubled sub-prime market. When we take the 233,001 home buyers who received notices in January and divide that by the total of 41.3 million mortgages we find that in January two-tenths of one percent of mortgagees got a letter.

So, the reality is that, yes, there are some problems in the mortgage market, just as there are some problems in the economy, but just as the economy isn’t in a recession, the mortgage market isn’t in a crisis.

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