Another year of bogus housing forecasts begins
Forecasters begin their yearly extrapolation of existing trends and pass it off as a genuine forecast.
A few weeks ago I announced that I began a new position as Market InSite’s Chief Economist. When people hear about what I do, one of the first questions they ask is “what’s going to happen in the real estate market?” I never answer this question directly. I usually tell them it depends on what happens with job growth, income growth, and mortgage interest rates. So far, I haven’t been asked to issue a forecast, and I hope they don’t.
I could issue a forecast. I’m fully capable of projecting future performance by examining past trends, but is that really forecasting? In my opinion, extrapolating recent trends or projecting past norms to next year’s performance isn’t forecasting at all. It’s little better than flipping a coin.
The consensus opinion this year, like every year, is for sales and home prices to rise 3% to 5%. A few plucky forecasters may depart from this range by a percent or two, but none have the courage to buck the herd. Perhaps analysts find no reason to depart from the consensus, but even if they believed their peers were wrong, most forecasters lack the courage to forecast outside the consensus.
Most economists who issue forecasts offer vague predictions that allow them to claim clairvoyance even when they completely miss. Further, “skilled” economists rewrite history to claim they predicted outcomes they failed to foresee. They live in fear that that nobody calls them on it.
Another tendency among these economists is to make predictions with low thresholds for success that may or may not have a causal relationship to the outcome. For example, if a forecaster predicts house prices will rise because the newly employed will buy more homes, did they really predicted anything? Prices will probably rise, and people will find new jobs, thus the low threshold for success. House prices may rise for a variety of reasons independent of people finding jobs, but if house prices go up, the forecaster looks prescient even when they predicted nothing.
Another common trait is to blame some completely unforeseen exogenous shock, like bad weather, when the prediction fails. The failed forecaster usually peruses the headlines for anything out of the ordinary and makes a causal connection where none really exists.
One of the problems with the economics profession is the tendency to shill for the people paying their salaries. Trade association economists, like those working for realtor associations, are the most compromised. They feel compelled to issue rosy forecasts no matter the circumstances. Think-tank economists tend to advocate for positions favored by their benefactors, and even academic economists develop biases due to their political views, and they slant their analyses to favor their pet political causes.
With all the nonsense surrounding these forecasts, it shouldn’t be surprising that some people are sick and tired of them.
Housing market’s crystal ball says prices near peak, as inventory, affordability keep market subdued
By JEFF COLLINS, Sept. 29, 2016
California’s housing market will post modest gains next year amid tight supplies and the lowest housing affordability in six years, the California Association of Realtors forecast Thursday.
Home sales are leveling off. Prices are rising more slowly. And even with mortgage rates near all-time lows, the California housing market is making a lackluster recovery from the Great Recession, said Realtor Chief Economist Leslie Appleton-Young.
“I think we’re getting close to the peak of the market, but we haven’t really had a stellar recovery either,” Appleton-Young said Thursday in an online news conference. “What you’re seeing in the California housing market is not what I would consider robust activity.”
While that is true, it isn’t what was stated in the standard realtor spin spouted over the last four years.
Even though the market is approaching its peak, she said, it’s not edging toward a crash – barring a major catastrophe like sudden mortgage rate hikes or a stock market meltdown.
“It’s really going to be more of a slow squeeze than a big drop,” Appleton-Young said. “We’re living that right now.”
This talk about a peak or a slow squeeze is very uncharacteristic for a realtor economist. If mortgage rates remain low, sales will increase, and house prices will keep going up. If mortgage rates go up, sales will slow down, perhaps significantly, but without a large number of foreclosures and subsequent liquidation, it’s very unlikely prices will drop.
As for 2017, the Realtor forecast predicted:
• Sales of existing single-family homes – which make up about 68 percent of the overall market – will increase 1.4 percent in 2017 to 413,000 transactions.
• That tally will be up from a projected sales drop this year of 0.4 percent to 407,300 deals, down from 408,800 in 2015.
Here is a nice example of revisionist history. CAr’s original 2016 forecast was as follows: “The CAR® forecast calls for an increase in existing home sales of 6.3 percent next year to reach 433,000 units, up from the projected 2015 sales figure of 407,500 homes.”
So where did the projected sales drop of 0.4% come from? I can’t find it. Their mid-year revised forecast (their first attempt to revise history) still shows a projected increase. CAr’s forecasts were completely wrong, but based on the statements above, a casual observer would conclude their forecasts were correct.
• Meanwhile, the median house price – or price at the midpoint of all sales – is projected to rise 4.3 percent to $525,600, the smallest percentage gain in six years.
• By comparison, 2016 house prices are projected to be up 6.2 percent to $503,900 by the end of December.
Market fundamentals support increased sales, Appleton-Young said. But global economic uncertainty and increasingly unaffordable prices will temper that growth.
Global uncertainty? When do we ever have global certainty? This is how the bogus “exogenous shock” argument is set up.
For example, just 29 percent of California homebuyers will be able to afford a median-priced house next year, the association predicted. By comparison, a third could afford that midpriced home this year and half could afford it in 2011-12, when the statewide median was under $320,000.
In Orange County, just 22 percent could afford the median-priced home by mid-2016, Realtor data show. Affordability stood at 30 percent in Los Angeles County, 41 percent in Riverside County and 56 percent in San Bernardino County.
Southern California sales are projected to remain virtually unchanged: Sales are projected to rise 0.4 percent this year and 0.7 percent next year.
The median Southern California house price is projected to increase 5.4 percent by the end of 2016 and 3.2 percent next year, rising to $501,500 in 2017.
The state’s hottest housing market – the San Francisco Bay Area – will see larger price jumps amid falling sales as buyers flee to more affordable areas. The forecast projected sales declines of 6.4 percent and 5.6 percent in 2016 and 2017, respectively.
Bay Area prices, meanwhile, are forecast to increase by more than 6 percent both this year and next, rising to $833,600 in 2017.
Mortgage interest rates are forecast to rise next year, but not by much. The average rate for a 30-year fixed mortgage is expected to be 4 percent in 2017, compared with this year’s near-record low of 3.6 percent.
Forecasters predict mortgage rates will rise every year, and yet we are at record lows. At least this year, the herd isn’t predicting mortgage rates to rise very much. I suppose that’s a start.
What’s holding back the market?
Baby boomers, Appleton-Young said. Data show 71 percent of homeowners age 55 and older haven’t moved since 1999. The typical seller now waits an average of 10 years to move vs. an average of under seven years since 2000.
Instead, homeowners are making their current residences a dream home, spending $3.9 billion on home remodels during the first seven months of 2016. That’s the highest amount in numbers dating to 1988, industry figures show.
Millennials, meanwhile, are more likely to rent than buy, Appleton-Young said, and many are forced to leave the state to find more affordable housing. First-time buyers made up just under 30 percent of those purchasing a home vs. a long-run average of nearly 38 percent.
Here’s a bold prediction (not): the share of first-time homebuyers will increase next year. Given the currently low levels of first-time homebuyer participation, it’s a low-risk prediction to say this number will increase.
As a result, the supply of homes for sale averages three to four months, compared with an average of five or six months before 2011.
That, said Appleton-Young, is “the new normal.”
“The level of unsold inventory for the foreseeable future is going to be lower,” she said.
While I agree with her assessment that inventory will be lower, she fails to mention the real reason for diminished inventory: lack of homeowner equity. Far too many homeowners are either underwater or lack the equity to execute a move-up trade. That’s what’s really holding back the market.