Wikinvest Wire

How so many economists got housing so wrong in 2007

Sunday, December 30, 2007

Check out this story over at CNN/Money about just how bad some economists did with their 2007 housing predictions. Of course the nation's last two chief economists, Alan Greenspan and Ben Bernanke are at the top of the list.

Former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke, after reviewing home sales and mortgage rates in fall 2006, were hopeful that the market had bottomed out.

"It may be too soon to say that it's over. It may not be too soon to say that the worst is over," said Greenspan in an October 2006 speech in Richmond, according to press reports.

In a November 2006 speech, Bernanke said he saw some "encouraging" signs in recent housing reports.

"Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets," Bernanke said.
...
Lisa Panasiti, a spokeswoman for Greenspan, said the former chairman was referring in his 2006 remarks to real estate's drag on gross domestic product, and that housing's hit on GDP has since eased.
The laughing stock of all economists, National Association of Realtors Chief Economist Lawrence Yun (following in the footsteps of the former laughing stock of all economists David Lereah) throws in his two cents.
The (National Association of) Realtors expected only a 1 percent drop in the pace of existing home sales, and a 1 percent gain in median prices. Instead, 2007 will likely end with a12.5 percent plunge in the pace of sales, and nearly a 2 percent drop in prices, the first such decline on record.

The group's current forecast for 2008 calls for a 0.5 percent increase in the pace of sales, and a 0.3 percent rebound in prices. But Lawrence Yun, chief economist for the trade group, said that making forecasts is even tougher this year than it was a year ago.

Yun forecasts essentially flat prices in 2008. Yet, he also believes there's at least a one in four chance that prices will fall more than they did this year, and about the same chance that prices could rebound by 3 percent or more.

"I would not be surprised if home sales improves in 2008," he said. "At the same time I can also foresee a circumstance where buyers continue to pull back, the inventory sitting on the market continues to build and it causes prices to go down further."
And a voice of reason - one of only a handful of economists that made any sense when talking about housing, both before and after the bubble burst.
Robert Shiller, a Yale economist who had argued for years that a bubble was forming in real estate prices, points out that one group was on target about where prices would go - investors in a real estate futures market that he helped set up on the Chicago Mercantile Exchange.

Starting in May 2006, the CME set up futures contracts for 10 metropolitan real estate markets, allowing investors to bet whether prices would go up or down and by how much.

By the end of 2006 those futures were pointing to real estate price declines between 5 percent and 7 percent in those markets, Shiller said. That ended up in line with the 6.7 percent annual decline in the October reading of S&P/Case-Shiller home price index, which was the largest drop recorded in that 20-year-old price measure.

"I'm not normally an advocate of market efficiency, but there's something to be said when you're putting money on the line with your prediction, rather than just talking," he said.

Those futures today are far more bearish about future housing prices than most current economists - foreseeing an additional 4 percent to 14 percent drop in prices over the next year.
Dean Baker is also interviewed in this story so you get the whole gamut - from the naive optimism of two Federal Reserve chiefs and trade group shill to economist Robert Shiller and Dean Baker of the CEPR who actually sold his house a year or two ago and became a renter because he thought that the housing bubble was getting ready to pop.

Do you think Dean Baker bought any gold coins with any of the proceeds from his real estate sale? No, that would be asking too much of any economist.

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12 comments:

Lampord said...

Thanks for very valuable CNN link of information.

Larry said...

In Your: "Predictions for 2007" back in January of 2007, I'm not sure you even got one out of ten right.
However, predicting stuff is one huge waste of time. But, calling out economists on it seems a bit silly.

Tim said...

puh-leeeze - I'll be doing the review of 2007 predictions later today:

1. The Housing Bubble Will Pop
2. The Dollar Will Not Tank
3. Stocks Will Soar
4. Interest Rates Will Remain Unchanged
5. Energy Prices will Continue to Climb
6. Gold and Silver Will Soar
7. Economic Growth will Slow, Consumption will Continue
8. Reported Inflation will Remain Contained
9. Job Growth Will Slow, But Not By Much
10. Nothing Will Blow Up (except maybe the Middle East)

Numbers 4 and 10 are the only ones that were bad.

Larry said...

You got 9 wrong and now you come back with spin. No problem. So, "puh-leeeze"........

Tim said...

Which one did I get right? Maybe we can agree on something...

Larry said...

First of two posts:
I wasn't trying to attack you as much as saying that guessing on housing has always been hard.Nor do I want to get into a pissing match liek a Yankees-Red Sox fan type of thing.

So, point by point will be nothing more than that. For example, you claim you couldn't have seen that the Fed was going to be dropping Fed Funds rates. But, to that I say too bad. A prediction is a prediction. (btw, many of us saw a credit bubble coming and something would have to give) Also, when you say "interest rates" did you mean treasuries only or mortgages? Because, overall, I thought that wasn't a bad call on your part (not the one I was picked, however)

Who would have or even could have predicted a 47% increase for 2005 in Phoenix?

Larry said...

1. The "housing bubble" did NOT pop in 2007.
2. The dollar reached a recent all-time low against a few major currencies, no? That's not a tank? (I am asking sincerely)
3. Stocks didn't soar. S&P 500 ended up 4.4%. The problem with full-year predictions is always that the year ends on 12/31
4. Short-term (and 10-year) rates fell. Mortgage rates stayed about the same.
5. Seems like being off $21 on where oil ends 2007 is a lot. What do you think?
6. Silver has bounced around for 18 months. It ended under $15 and gold finished at 733. Gold was a better call.
"Junior mining companies will start to be talked about at cocktail parties - like internet stocks circa 1996 or 1997." - Really bad call.
7. "Economic Growth will Slow, Consumption will Continue"
With everyone calling the consumer dead (oil & housing/credit) you called it right on.
8. "Reported Inflation will Remain Contained" - I don't know because I don't believe anything that is reported, especially by the government. So, maybe you got it right here.
9. "Job Growth Will Slow, But Not By Much" - So, you believe the numbers? I don't.
10. "Nothing Will Blow Up (except maybe the Middle East)" - pretty bad but not your fault.

Btw, All of the past Foreclosure numbers reported by RealtyTrac and published on Yahoo and MSN Money have been wrong for years. That's right, years. They admit the problem but refused to change until Jan '08.
What was wrong? They reported every single filing on a property as a Foreclosure. We bagged them in August and this "Discreet Properties" list won't be changed until this year.
So, if a property has two loans (First and a HELOC second), and they were delinquent they could receive 2-3 such notices 2-3 times for each loan. In that case RealtyTrac was reporting 6 notices of foreclosures! (and, not all actually ever made it to the courthouse steps!)
Why would they do that? Because they were selling the lists!!!!!

Tim said...

That's interesting about the foreclosure stats...

As for the predictions, these were not "Predictions for December 31st, 2007", these were just "Predictions for 2007" as it says in the title. If I meant year-end, I said so in the prediction and I defined what I meant by "pop", "not tank", etc. providing specific numbers such as "The trade weighted U.S. dollar index will continue its decline and be positioned firmly in the mid seventies by the end of the year." If you say this is no good because it ended at 76.6 instead of 75.0, then you just have higher standards for awarding credit than I do. Some comments/answers to your questions:

1. I see you are somehow involved in real estate - that probably explains your comment on this item. Good luck with that.
2. I would not call an 8 percent decline in a currency "tanking" - I'd reserve that term for maybe a 20 percent drop but, again, I did say mid-70s by the end of the year.
3. I make the rules for my predictions and I didn't say they would still be soaring at year-end, which is clearly not the case.
4. I was talking about the Fed Funds rate and the ten-year note.
5. Off by $21 is a lot but there were two other calls there - peak and average. Average was within two dollars and the peak was within $9 - these were very good calls given that oil looked like it was headed toward $40 at the time. I would've guessed higher, but I was spooked by the late-2006 sell-off too.
6. The junior mining stocks call wasn't bad, it was just early.
7. ding-ding-ding thanks
8. ding-ding-ding thanks again
9. I don't believe the numbers for construction employment but I do believe that the service sector was still going strong during 2007 and the end result was job growth that slowed, but not by much.
10. Yes, this was bad.

I just subscribed to your feed - I'm going to keep an eye on you.

Larry said...
This comment has been removed by the author.
Tim said...

Maybe this excerpt from the original post will help, "When the word "pop" is used here it refers to a 10 percent decline in the year-over-year national OFHEO resale price data"

If you think a bubble popping means an 85 percent reduction in price, then you are correct that the housing bubble has not popped.

On your advice, I unsubscribed to your feed.

Larry said...

It didn't even drop 10% in 2007. Many metro markets saw increase, such as SF, NYC, Portland, Seattle to name a few. But, even if it had the word "bubble" is both ridiculous and overused.
Heck, on that basis, the bubble in Gold and in GOOG popped several times in the past two years......

Anonymous said...

Larry,

You are so wrong, it's sad. Compared to other predictions I've read, Tim's success rate has been outstanding.

Gold and GOOG could both be in a bubble (particularly GOOG, but I suspect gold will get there too). However, it is relatively easy to call a housing bubble when housing prices increase wildly out of proportion with household income. Living in LA, it's not hard to call -- just take a look at Tim's Case-Shiller charts.

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