You've seen the headlines:
- "U.S. Home Foreclosures Soar in July"
- "Congress Struggles With An Avalanche of Foreclosures"
- "Arizona foreclosures up 189%; state ranks No. 8"
Kind of scary, huh?
The thing is, it actually might not be so bad. Yes, it's true that more foreclosures signal an increase in broken real estate dreams for many people, along with greater financial hardships. But there are some other ways to look at the situation. For one thing, higher foreclosure rates indicate a greater opportunity for those who want to snag some homes inexpensively, as investments.
And here's another take that I ran across on our Buying or Selling a Home discussion board the other day. One Fool community member gets "a little annoyed at headlines touting silly statistics -- particularly comparisons of statistical outliers. The most recent display of editorial ignorance is in mortgage foreclosures." (Sound familiar?) He then cited this headline: "Foreclosure Filings in U.S. Increase by 93%." And he explained:
Talk about a meaningless statistic. From around 2000 through sometime in 2005 or 2006, foreclosures were running near zero in many parts of the U.S. Prices were increasing fast enough that if you made your payments for 4 or 5 months, you probably had a gain on your property and would have to be a complete idiot to allow a foreclosure to proceed. It was just too easy to sell and avoid foreclosure. So when you compare unusually low numbers from that time frame to today's numbers, of course you're going to get headline-making increases. You are comparing a statistical outlier (the foreclosure rate from 2006) to something closer to a "normal" number (today's foreclosure rates).
He went on to offer some "real data," finding the current foreclosure rate (of about 1.7% of households) to be in the same neighborhood as a Federal Housing Administration rate of roughly 2% from about a decade ago. So it's probably just a matter of time before we see someone take those stats and claim that foreclosure rates are plunging.
Math matters
This reminds me just how important it is to take in the big picture when you're evaluating companies and investment opportunities. You might find yourself excited when a company reports its "15th consecutive record quarterly earnings." That sure sounds impressive, and it's better than posting decreases in earnings. But the company might have reported $3 in earnings per share (EPS) a few years ago, followed by $3.01 in the next quarter, and $3.05 in the following quarter, and then $3.06 and $3.07 and $3.09 ... you get the idea. That's not exactly torrid growth.
The following companies recently made news with "record earnings." I'm adding the actual percentage growth rate to them, so you can see just how widely such records can vary:
- BHP Billiton (NYSE:BHP) saw profits rise to a "record" $13.4 billion, up from $10.5 billion a year ago. That's 27.6% growth.
- Astro-Med (NASDAQ:ALOT) posted "record" sales of $18.7 million for its recently ended second quarter, up from $16.3 million a year ago. That's 15% growth.
- Archer Daniels Midland (NYSE:ADM) posted "record" earnings for fiscal 2007 of $2.2 billion, up from $1.3 billion a year ago. That's 65% growth.
- Lowe's (NYSE:LOW) reported "record" quarterly earnings recently of $1.02 billion, up from $0.94 billion a year ago. That's 9% growth.
- Toyota (NYSE:TM) recently reported "record" quarterly earnings of $4.1 billion, up from about $3.1 billion a year ago. That's 32% growth.
So whether you're looking at economic data or a company's prospects, don't get tricked by a quick one-liner. Sometimes you need a deeper look to get the whole story.
