Flock of Black Swans

Marketwatch reports today:

"Top officials with the National Association of Realtors and Standard & Poor's, which issues the S&P/Case-Shiller Home Price Index, agreed this week their monthly reports are giving imprecise readings of price changes at all levels -- national, state and regional -- due to rare market conditions that are skewing survey results.

The NAR reported last week that U.S median home prices fell 7.7% in March from a year ago. The decline resulted largely from a market anomaly -- a steep decline in costlier home sales due to tighter lending standards and high jumbo-mortgage rates, coupled with a foreclosure-driven spike in cheaper homes."

Never mind the fact that it's the NAR speaking here, consummate "we've found the bottom" spinners, what's this about "rare market conditions" and "market anomalies?" Oh, what they're saying is "our indices don't work in this kind of housing bubble downturn because they're designed to reflect other kinds of market downturns," which is blather. There's nothing "rare" going on here as a statistical phenomenon, however rare it may be as an economic one. Housing prices will act exactly like this whenever this kind of thing happens, it's normal and rule-conforming behavior in these situations. What the index makers are really saying is "we can't model what we said we were going to model, because we've never seen it before, in all 7 years or our index's existence."

We've seen a profusion of black swans recently: "We have 100-year events all the time now." What few will say is that we really don't know how to model things, with all the statistical and computational tools at our disposal, we don't know what the inputs are. There are no black swans on the East Coast, but there is a lot of migrating goose poop.