the audit

Debits & Credits

A glaring and common mistake on housing; more good NYT work on foreclosures; Portfolio (heart) Big Pharma, etc.
June 2, 2008

A Debit to just about everybody for constructing a piece of housing news that doesn’t stand up.

We learned from countless outlets that sales of new, single-family homes were up 3.3 percent in April, in comparison to the previous month.

Reuters told us. MarketWatch told us. Agence France Presse told us. Bloomberg told us. The AP told us. And so, with less fanfare, did The Wall Street Journal, The New York Times, and The Financial Times.

Such a prestigious journalistic consensus must be true, right?

Um, no.

In fact, the only true consensus is the willingness to publish a meaningless monthly housing statistic just because the government puts it out.

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It’s all here in black-and-white: a joint report by the U.S. Census Bureau and the Department of Housing and Urban Development.

The report does list a 3.3 percent increase, but a couple of pixels away from it we get a more significant number: the margin of error—11.7 percent.

That’s right.

A margin of error larger than the statistic itself—in this case more than three times as large—renders that statistic meaningless.

So all we know with relative certainty is that the change falls somewhere between -8.4 and +15 percent. So maybe sales did increase 3.3 percent. Or maybe they decreased 3.3 percent. Or 7 percent. Or… well, you get the picture.

And, appropriately, the report warns:

[T]he change is not statistically significant; that is, it is uncertain whether there was an increase or a decrease.

We’re as eager for information on the state of the housing market as anybody. But we would rather have no information than false information. And while some organizations did downplay the importance of the statistic, they didn’t go far enough.

We weren’t the only ones to notice the problems with the housing numbers. Barry Ritholtz, who makes a habit of analyzing this sort of thing, noted the problem on his website.

He also lists yet more weaknesses in the statistics, like the fact that the April increase, such as it is, is only due to a downward revision of the previous month’s figure.

The press did generally observe this peculiarity, so we don’t criticize reporters for an omission here. But it does point to a broader issue: The practice of comparing revised to unrevised figures. This doesn’t make sense.

As Ritholtz notes:

The overall trend for the past year has been mostly downward revisions. An apples-to-apples comparison would be an original release to original release (that [for the latest figures] showed flat data, not an increase in new homes sales).

Comparing the original (but soon to be revised) April data to the revised March data presents a misleading picture.

Given the downward trend, anyone want to take bets on which way April will go?

With the mortgage crisis, the housing beat has gone from backwater to front and center. Reporters need to keep up.

Harper’s strong again on the economy

A Credit to Harper’s for raising questions about the reliability of gross domestic product as an indicator of the health of the economy, by publishing excerpts (subscription required) from Senate testimony on the matter.

Jonathan Rowe, a journalist and community organizer, argues that GDP doesn’t give us enough information about the economy, and he sets his sights on the concept of growth.

Growth is good, right? Not necessarily, argues Rowe. He criticizes both the government and the media for thoughtlessly touting GDP growth, rather than examining what exactly is fueling that growth.

To be reflexively against growth is as numb-minded as to be reflexively for it. Those are theological positions. I am arguing for an empirical one. Find out what is growing and the effects. Tell us what this growth is in concrete terms. Then we can begin to say whether it has been good.

Take this example of the GDP obfuscation:

The GDP makes no distinction between a $500 dinner in Manhattan and the hundreds of more humble meals that could be provided for the same amount…. As included in the national accounts, an accretion of luxury buying at the top covers up a lack of necessary buying at the bottom. As the income scale becomes more skewed, the coverup becomes even greater. In this respect the GDP serves as a statistical laundry operation that hides the suffering at the bottom.

This piece builds nicely on a couple of others we’ve noticed recently about how key economic numbers have diverged from reality.

So why should we listen to Rowe and not the economists? Dean Baker over at The American Prospect has a good answer in his discussion of why the media and economist mostly missed the housing bubble.

NYT reports on housing heartbreak

A Credit to The New York Times business section for some sobering reality on how the housing bust actually affects real people.

The Times writes about contractors who clean up and maintain houses that are in foreclosure. It’s an appropriately painful article that sidesteps the landmines about so-called trash-outs that other publications have hit full on—namely that as many as half the ticked-off homeowners vandalize their homes on the way out. That’s spin that suits the mortgage industry just fine.

Mortgage companies hire contractors like these men to inspect and maintain houses that once-proud owners can no longer afford and no one else wants. These days, business is brisk.

These contractors and thousands like them see first hand the detritus of the subprime era: peeling paint, gutted interiors, family dogs left behind to starve, overgrown lawns infested with snakes.

The part we winced at comes further down:

In most cases, the contractors do not interact with the homeowners, but sometimes the contractors are present during evictions that are conducted by county sheriffs. Mr. McCallister recalled the eviction of a 60-year-old man who had misread his eviction notice and thought he had one more week to leave.

‘He fell down on the floor and started crying,’ Mr. McCallister said. ‘We gave him 24 hours and he had his stuff moved out and he found another place to live.’

That is the reality of the housing crisis.

A fine WSJ expose

A Credit to The Wall Street Journal for a front-page piece (subscription required) that goes well beyond stenography to explore just how much banks may be manipulating the London interbank-offered rate—Libor—a key interest-rate measure that affects payments on $90 trillion in debt.

Libor purports to measure how much banks are charging to lend to one another. That’s key because higher Libor rates can signal problems in the banking system when banks don’t trust each other to make good on their loans. The Journal wrote last month that banks appeared to be low-balling their reports (Libor is calculated by surveys, not actual trades) in order to deceive markets into believing they are healthier than they really are.

Reporters Carrick Mollenkamp and Mark Whitehouse compared the divergence between Libor and another measure of risk, the credit-default swap, which is a contract that insures against an inability to be paid back. They found that the disparity between what CDS prices suggest troubled Citigroup is paying and what Citigroup reports it’s paying is the widest of any bank. Also up for scrutiny is JPMorgan Chase, whose analysts and others were quick to dis the Journal.

But the WSJ clearly spelled out potential shortcomings in its analysis and did so up high in its story. The paper used enterprise reporting—and three nods from well-respected finance professors on its method’s usefulness—to look at a murky problem that it and nobody else is able to fully quantify.

For that we tip our green lampshades to the Journal for its creativity, for staying on this big story, and for healthy skepticism of official figures in general. Here’s more Audit analysis of the piece.

Portfolio’s pharma boosterism

A Debit to Portfolio for a problematic take on the neurotechnology industry, which is the business of developing drugs that act on the brain.

The piece leans too far toward utopianism—drugs will save us all!—and too far away from critical analysis. The headline sets the tone: “The Ultimate Cure.”

But our biggest gripe with the piece is that it doesn’t rise to the fundamental challenge in writing about medical research from a business perspective: balancing the merits of smart business strategy and smart medicine.

The combination of medical research and corporate profit has always been a difficult issue, and the mix of the two has reached disturbing proportions. It has gotten to the point where Harvard professors level this kind of charge:

Pharmaceutical companies have enticed a number of respectable research physicians into endorsing questionable studies, and through the use of direct advertising to patients and sophisticated marketing they have endangered the integrity of the American health-care delivery system.

Not that we get this from Portfolio, which falls down badly on the issue of the ethical implications of corporate medical research by pretty much ignoring it.

And given that the neurotech boom is not quite new, the reason for this article is a bit elusive. What is clear, though, is that its timing leaves the writer walking a fine line: it coincides with a push by industry founders “to get more federal dollars channeled toward the industry.”

One of these founders, Zach Lynch,

has been traveling back and forth to Washington, sometimes taking along neurotech C.E.O.’s, to promote a $1 billion ‘national neurotechnology initiative’ that Representative Patrick Kennedy, a Rhode Island Democrat, recently announced he will introduce in Congress. The legislation asks the federal government to spend $200 million a year for five years on neurotech, including $30 million for the Food and Drug Administration to train more experts, $80 million for the National Institutes of Health to coordinate the neuroresearch efforts that are now run by 16 different institutes, and $75 million to increase small-business grants for neurotech companies.

This kind of publicity certainly doesn’t hurt, especially for an industry whose billions of dollars in profits are a mere fraction of the ultimate potential, according to analysts, but which now is stuck in a bit of a rut.

Lynch and his wife, we learn, convinced Nasdaq to launch a neurotech index, NERV, last fall. A sign of big money. But:

Brain businesses are still more likely to lose money than to make it. The failure rate is startling even for the pharmaceutical industry, which is accustomed to tremendous risk. … The risk, along with the generally volatile economic climate, has helped send NERV tumbling more than 18 percent since its inception last September.

Portfolio is covering an industry that is looking to generate what this piece calls “cash and cures”—not, we observe, “cures and cash,” a small but telling difference. It’s a tricky beat, and requires more thought than Portfolio put into it.

A strong New York piece on Brooklyn

A Credit to New York magazine for finding an engaging way to talk about an important but tired issue: urban gentrification and the anger and anxiety it produces.

The article, by Adam Sternbergh, describes the goings-on in the comment section of one of the most prominent Brooklyn blogs, Brownstoner.

Our eyebrows raised when we saw that the piece focused on a Web site. It seemed a bit, well, insular. But the pixelated firing-range turns out to be fertile ground, with posters expressing resentments and fears that they might be tempted to hide, or at least tone down, in person.

Sternbergh structures the piece around a pitched battle between the Web site’s manager and a mystery poster, or posters, called The What. The sheer venom of the fight—some of it justified, some of it excessive—will keep you reading. And, like a kid watching a schoolyard fight, you’ll probably be both intrigued and uncomfortable.

For a look at what Brownstoner readers thought of the piece, click here.

Finally…

…a few more Credits:

To The New York Times for an excellent front-page story on how employees of U.S. Sugar got a bitter retirement deal and have accused the higher ups of cheating them. Here’s more Audit analysis (second item).

To Smart Money for an engrossing piece on wildcatters trying to cash in on high oil prices.

To The New York Times for Nobel Laureate Amartya Sen’s analysis of the food crisis. Articles on the topic are appearing all over the place, but few observers have as much authority—or as much compassion—as Sen.

Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.