Home Prices and Math Illiteracy on the Markets

Say home prices have fallen 20% to date, and you expect them to fall another 10%. How much will they have fallen in total? A guest just now on CNBC just said, in passing, that would make for a 30% overall home price decline.

Oye. No it’s not. If home prices fall 20%, and then fall another 10%, the second 10% is from a lower base price, not from the original price. As a result, the total percentage drop is less than the sum of the two figures, or 28% in total.

Granted, both price declines are large losses — and don’t even get me started on how useless these forecasts are, in the first place — but that’s not my point. It bugs me when people can’t get basic math right, but still want us to trust them with their money-making ideas.

Related posts:

  1. U.S. Home Prices as a Rollercoaster Ride
  2. Economics of Home Renovations
  3. LCD Panel Prices Continue Freefall
  4. Fixing Your Home Hedge
  5. Apple Cuts iPhone Prices — Sort of

Comments

  1. Derek Jones says:

    Talking of cutting maths (yes, I know people in the US spell it without the s) corners. No more claims of power laws please Paul, unless you have done more than spotted a straight line on a log/log plot:
    http://cscs.umich.edu/~crshalizi/weblog/491.html

  2. John says:

    Well it depends on what he meant though right? People often use an additional 10% more as a “shorthand” for 10% from the peak.

  3. Blutskralle says:

    I was about to echo John’s comment; I think the real crime with most discussions of math is the lack of specificity.
    10% of what, exactly?
    That’s the key point here.

  4. I just finished reading Darrell Huff’s classic, “How to Lie with Statistics”. I see nothing has improved in the last 50 years.

  5. Agreed, it does depend on what percentage from what level, but the onus should be on him to be more specific. Say we were talking about larger numbers, like 20% and and 40%, rather than 20% and 10%, the differences get to be large indeed.

  6. Suh Min says:

    What a waste of photons. It’s all irrelevant broker-speak. The fact is, anyone who measures falls from peak numbers deserves to be fooled. It’s as useless the inverse of the likewise meaningless numbers the NAR proffered when the housing bubble was forming.
    Taking these numbers seriously is like counting the flavoro’s in a box of fruit loops.

  7. You’re 110% right Paul.

  8. Dow30000 says:

    how about kudlow saying that the market was down 190% after inflation from 1965-1982
    short traders would love to see 190% drops, but of course, it’s impossible
    see this clip for evidence:
    http://www.cnbc.com/id/15840232?video=697561150&play=1
    listen from about 2:10 to 2:25
    fyi, kudlow is referring to this article from the WSJ:
    http://online.wsj.com/article/SB120649226977964203.html?mod=hps_us_mostpop_viewed

  9. Aswath says:

    I agree that it is discomforting when people can’t get basic math right. On a related point, can you please tell me how in a random walk where “a drunk who starts at a lamppost and staggers, one step at a time, each step in a random direction, will pass the lamppost an infinite number of times, albeit each time longer apart.” (http://paul.kedrosky.com/archives/2007/07/02/a_practical_les.html). I thought random walk has memory-less property. So when the drunkard returns to the lamppost, he essentially restarts the process as if he is starting it afresh.