When Two Housing Numbers Rise Together: Correlation vs. Cause

A headline says home prices and some other number have both climbed, and the implication hangs in the air: one must be driving the other. Is that fair? Often it is not. Two figures that move together are a reason to look closer, not a conclusion, and learning to tell the difference can keep a household from building a decision on a coincidence.

Key takeaways

• Two numbers that move together are a clue worth investigating, not proof that one causes the other.
• Any two measures that both grow about 3 percent a year will end a decade about 34 percent higher, which looks like a perfect match even if they are unrelated.
• A third factor, such as inflation or interest rates, can push two trends in the same direction at once.
• A series can change how it is measured, as the Freddie Mac weekly mortgage rate did in November 2022, which is worth checking before comparing across that date.
• Today's payment, rate and budget are facts a household can work with even when the reason behind a trend is unclear.

Why lines that rise together can mislead

A great many money figures drift upward over time. Prices, rents, wages and insurance costs all tend to rise as years pass, partly because of inflation and population growth. Put almost any two of them on one chart and the lines will look related.

A quick calculation shows how strong the illusion can be. Suppose two unrelated measures each grow about 3 percent a year. After ten years, both are about 34 percent higher than where they started. Their lines would sit nearly on top of each other, yet nothing connects them. This is why careful readers ask for more than a matching direction.

An everyday example makes the same point. On hot days, ice cream sales go up and so do trips to the beach. Neither causes the other. Warm weather is behind both.

Three ways a pairing can fool you

When a headline connects two trends, a few explanations are worth ruling out.

• A third factor drives both. Inflation, interest rates, local job growth or population changes can push several housing and money numbers in the same direction at once. If a headline links two of them directly, ask what else could be moving them.
• The arrow runs the other way, or in both directions. Suppose a town sees more new construction and higher prices. Builders may add homes because prices are rising, rather than prices rising because of new homes. Sorting out which came first takes more than a chart.
• It is chance, or a short window. Pick a short stretch and two series can line up by luck. Pick a different start date and the relationship may vanish.

Check how the numbers are measured

Another quiet problem is a change in measurement. The weekly average mortgage rate that many news stories quote comes from a Freddie Mac survey. According to Freddie Mac's survey page, since November 17, 2022 the weekly figures have come from loan applications submitted to Freddie Mac, rather than from a survey of lenders. The page notes this as a methodology change.

A change like that does not make the number useless, but it is a reason to read the notes before comparing a figure from before the change with one after it. Official data pages often explain what a figure covers, which loans it includes and what has changed. A chart that skips those notes may be mixing apples and oranges.

Acting on facts without knowing the cause

Does a household need a full explanation of a trend before it makes a decision? Not always. Some facts are available no matter why they exist. A household can see its own income, its savings, the payment on a loan estimate and what it could comfortably carry if rates or prices moved. Planning around those facts can be sensible even when the reason for a market trend is debated.

Waiting for a perfect explanation can also carry a cost. It is a trade-off, and the other side exists too: a story that sounds convincing can lead someone to act on a connection that is not real.

The difference lies in how a figure is being used. A statement like "the current quoted rate would make this payment about this much" is a fact to work with. A statement like "because these two lines moved together, this will happen next" is a prediction, and it deserves more scrutiny, especially when it comes with a reason to act right now.

Questions to ask when you see a chart or headline

1. What exactly does each line measure, and over what period?
2. Could something else, such as inflation or interest rates, be pushing both?
3. Which moved first, and could the relationship run the other way?
4. Did the way either number is measured change during the period shown?
5. Is the claim a fact about now, or a prediction about what comes next?
6. Who benefits if I believe the connection is real?
7. What do my own budget and loan numbers say, apart from the headline?

None of these questions needs special training. They slow a headline down enough to ask whether it supports the conclusion drawn from it.

Common questions

What is the difference between correlation and causation?

Correlation means two things tend to move together. Causation means a change in one produces a change in the other. Many pairs of trends move together because of a shared cause, the direction runs the other way, or it is chance.

Do I need to understand why a trend is happening before I act on it?

Not always. A household can plan around facts it can see today, such as its own budget and the payment on a loan offer. The cause matters most when a claim says that doing one thing will produce a particular result.

How can I tell whether a chart is misleading?

Look at the time window, what each line actually measures, whether the measurement method changed, and whether a third factor such as inflation could be driving both lines. Official data pages usually list their methods and any changes.

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