Tuesday, January 06, 2009
In looking back at material from a year ago as part of doing the normal year-end things around here, the item below was stumbled upon. It contains some very interesting looks both backward and forward from the vantage point of January 2008.
It seems funny to read this commentary a full year later.
Of course, it's not nearly as funny as reading the stuff that appeared back in 2005 when the housing bubble was at its peak and there was nary an indication that prices would begin plunging at horrific rates in a matter of just a couple years.
But one year ago, the handwriting was on the wall and anyone who was predicting a rise in home prices was either completely out-of-touch or an industry shill.
Interestingly, futures based on the Case-Shiller Home Price Index got the 2007 decline mostly correct but underestimated the 2008 plunge by a wide margin.
From December 30, 2007:
How so many economists got housing so wrong in 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.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.
"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 (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.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.
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."
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.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.
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.
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.