Will the CAr 2015 housing market sales forecast be way off?
The California Association of realtors housing market sales forecasts for 2013 and 2014 were way off. How bad will their 2015 miss be?
Past performance is not always the best indicator of the skill of forecasters. For example, if meteorologists issue a standard forecast for weather in Southern California of morning clouds, afternoon sun, and highs in the upper 60s or low 70s, they would be correct over 80% of the time, but what have they forecast? Nothing. They merely predicted the average condition, and the average condition happened.
The art of forecasting is to predict deviations from normal. It’s a process of examining current conditions and running them forward with a deep understanding of how variables will interact and produce unusual outcomes.
On January 1, I published the post Bold California housing market predictions for 2014. My intention was to highlight the unusual conditions and make predictions outside the mainstream. For example, I predicted home sales volumes would be down in 2014 when the consensus said sales volumes would rise.
LOS ANGELES (Oct. 8) – After distressed sales lost their hold on much of California’s market, the state’s housing market will continue to improve in 2014, with sales shifting toward primary home buyers and both sales and home prices posting further gains, according to the CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.) “2014 California Housing Market Forecast,” released today.
The C.A.R. forecast sees sales gaining 3.2 percent next year to reach 444,000 units, up from the projected 2013 sales figure of 430,300 homes sold. Sales in 2013 will be down 2.1 percent from the 439,400 existing, single-family homes sold in 2012.
“The housing market has improved over the past year, and we expect this trend to continue into 2014,” said C.A.R. President Don Faught. “As the economy enters the fourth year of a modest recovery, we expect to see a strong demand for homeownership, as buyers who may have been competing with investors and facing an extreme shortage of available housing return from the sidelines.”
Reading past the spin and bullshit typical of realtor association press releases, it’s obvious that CAr issued a rosy forecast that was very unlikely to come to pass because owner-occupants weren’t going to step into the void left behind by investors, and they had no reason other than wishful thinking to believe this would happen.
The current projections for 2014 are an 8.2% decline in sales rather than a 3.2% increase. That’s an 11% miss, not an insignificant number, and they got the direction wrong. How many bad misses like that before people stop paying attention to their forecasts?
Notice also that sales in 2013 were down 2.1% from 2012. How did CAr do on that one?
LOS ANGELES (Oct. 2) – California’s housing market will continue to recover in 2013, as home sales are forecast to increase for the third consecutive year and the median price to rise for the second straight year, according to the CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.) “2013 California Housing Market Forecast,” released today.
The C.A.R. forecast sees sales gaining 1.3 percent next year to reach 530,000 units, up from the projected 2012 sales figure of 523,300 homes sold.
Well, they predicted a 1.3% increase when a 2.1% decrease actually occurred. While they only missed that one by 3.4%, more importantly, they missed the direction of sales. They were hoping for positive momentum, and what we’ve seen over the last two years has been steadily declining sales volumes.
So how far off will CAr be with its 2015 forecast?
California home sales to increase slightly, while prices post slowest gain in four years
LOS ANGELES (Oct. 7) – With more available homes on the market for sale, California’s housing market will see fewer investors and a return to traditional home buyers as home sales rise modestly and prices flatten out in 2015, according to the CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.) “2015 California Housing Market Forecast,” released today.
The C.A.R. forecast sees an increase in existing home sales of 5.8 percent next year to reach 402,500 units, up from the projected 2014 sales figure of 380,500 homes sold. Sales in 2014 will be down 8.2 percent from the 414,300 existing, single-family homes sold in 2013.
Back in late 2012, they were predicting sales to reach 530,000 units. Now they would be happy to see 402,500 units. While that may be an increase of 2014’s dismal numbers, it’s more than 20% below their hopes for 2013.
“Stringent underwriting guidelines and double-digit home price increases over the past two years have significantly impacted housing affordability in California, forcing some buyers to delay their home purchase,” said C.A.R. President Kevin Brown.
They lament the loss of toxic mortgages that in past cycles would have inflated a new bubble and kept sales volumes up despite high prices. (See: New mortgage regulations change how real estate markets work)
“However, next year, home price gains will slow, allowing would-be buyers who have been saving for a down payment to be in a better financial position to make a home purchase.”
What? If prices are going up, isn’t that making it more difficult for people to buy a home? That statement is obviously nonsense, but I can’t determine if it’s doubletalk, spin, or disguised wishful thinking because rising prices directly contradicts their main prediction that sales volumes will go up.
“Moreover, prospective buyers should know that it’s a misperception that a 20 percent down payment is always required to buy a home. There are numerous programs available that allow consumers to buy a home with less down payment, including FHA loans, which lets buyers put down as little as 3.5 percent,” continued Brown.
Do they really think potential buyers are too ignorant to realize they can get an FHA loan? The truth is people know they can get FHA loans, they simply don’t want to pay, or can’t afford to pay the high cost.
C.A.R.’s forecast projects growth in the U.S. Gross Domestic Product of 3 percent in 2015, after a projected gain of 2.2 percent in 2014. With nonfarm job growth of 2.2 percent in California, the state’s unemployment rate should decrease to 5.8 percent in 2015 from 6.2 percent in 2014 and 7.4 percent in 2013.
Is that level of job growth — assuming it actually happens — is that enough to make home sales go up?
The average for 30-year fixed mortgage interest rates will rise only slightly to 4.5 percent but will still remain at historically low levels.
Last year everyone thought mortgage rates would rise to near 5% (me included), and now everyone believes mortgage rates will remain low. If mortgage rates do remain low, it will likely correspond to continued economic weakness, which won’t be a boost to sales.
The California median home price is forecast to increase 5.2 percent to $478,700 in 2015, following a projected 11.8 percent increase in 2014 to $455,000. This is the slowest rate of price appreciation in four years.
“With the U.S. economy expected to grow more robustly than it has in the past five years and housing inventory continuing to improve, California housing sales and prices will see a modest upward trend in 2015,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “While the Fed will likely end its quantitative easing program by the end of this year, it has had minimal impact on interest rates, which should only inch up slightly and remain low throughout 2015. This should help moderate the decline in housing affordability we saw occur over the past two years.”
More doubletalk. If affordability is the problem — which it now is — then rising interest rates will make that worse. It would take rising wages to make up the difference, and that doesn’t seem likely.
“Additionally, the state will continue to see a bifurcated market, with the San Francisco Bay Area outperforming other regions, thanks to a more vigorous job market and tighter housing supply.”
Last year I predicted sales volumes would decline because owner-occupants would not step up to take the place of investors, and I was right.
Next year, I think sales volumes will underperform again, perhaps even decline again, but this time it will be because declining affordability due to rising interest rates prices out marginal borrowers. The cause of weak sales in 2015 will be completely different than 2014, but the results will be similar: low home sales volume.