Feb132015

The most foolishly optimistic housing report of 2015

Many people read financial news for emotional confirmation about decisions they already made, and the financial media panders to these readers.

corporate-newsI’ve written a number of times about the tendency of financial media reporters to provide optimistic spin and emotional support to gain readers, and reporters hope to influence public behavior and stimulate the economy.

Personally, I think providing emotional therapy is a task better left to family, friends, or paid therapists, and the idea of MOPE (Management of Perspective Economics) is pure lunacy. No matter how influential the reporter, they simply don’t have the power to move financial markets or the overall economy.

I had people condemn me back in 2007 and 2008 for “talking down the housing market.” Although it would be ego-inflating to believe I had such power, no amount of good or bad writing about any macroeconomic variable is capable of influencing what the market is going to do, and belief to the contrary is either self aggrandizement or wishful thinking.

The financial media exists to provide facts to people who need to make important financial decisions based on those facts. cheerleadingA few skilled analysts may provide meaningful analysis to assist people in making decisions, but even the most skilled analysts are sometimes wrong, so no analyst should be relied upon for any financial decision.

The most useless form of financial story is the “rah rah” piece that provides platitudes and anecdotes from questionable sources (realtors and economists) that serve no other purpose but to make those who’ve already made a decision feel good about it. Today’s featured article is a “rah rah” piece, the worst I’ve found so far in 2015.

How high will housing rise in 2015?

By Jonathan Berr, February 11, 2015, 8:52 AM

Notice the headline assumes house prices will rise in 2015. Is that a certainty? What happens if mortgage rates rise to 5% or higher? Will house prices continue to rise?

Most economists agree that the U.S. housing market is continuing to rebound after the economy suffered its worse decline since the Great Depression.

blinded_economistsMost economists are wrong most of the time.

But they vary widely in their expectations for how strong that rebound will be.

The consensus is a herd that fears deviating too far from its peers. As Barry Ritholtz recently opined, “The Mainstream strategy is simple: Take the average annual change in whatever the subject at hand is and extrapolate forward a year. Voila! You have a mainstream forecast. … If you are feeling puckish, you can shade the numbers slightly up or down to separate your prediction ever so slightly from the rest of the pack — just to keep it interesting. …”

At least, housing seem likely to improve on a disappointing performance in 2014, when November’s existing single-family home sales unexpectedly slumped to the lowest in six months.

As I pointed out in Bold California housing market predictions for 2015, it’s a weak and timid forecast to predict an increase simply because the forecaster doesn’t believe conditions could get any worse.group_failure

Andres Carvacho-Burgos, an economist at MoodysEconomy.com, is one of the more optimistic observers. He expects existing-home sales to jump 20 percent this year, more than double the forecast of economists at the National Association of Realtors and Barclay’s Bank, which both see existing-home sales gaining in the single digits.

I give him kudos for the courage of his convictions. If he turns out to be foolishly wrong, nobody will remember him, but if he turns out to be right — even for all the wrong reasons — he will be hailed as a prescient genius.

Behind his bullishness are his expectations for strong household disposable income growth, bolstered by a jump in household formation. Moreover, Carvacho-Burgos is among the many economists who don’t see the Federal Reserve raising interest rates from their historically low levels until 2016.

Janet_Yellen_housing_bubbleI agree with him on the last point (See: Why the federal reserve will not raise rates in 2015).

“We expect the U.S. to finish a full economic recovery by late 2015/early 2016,” he wrote in an email to CBS MoneyWatch. “That is, the U.S. doesn’t just regain the jobs it lost in recession, but also recovers most of the jobs it would have gained in 2008-2009 if there had been no recession….

That doesn’t seem very likely to me (See: Housing market faces intractable problems with demand)

By contrast, a large number of other analysts expect a much slower recovery path. … All of this adds up to a burst in homes sales rather than a slow increase, although the burst will not be as large as the previous decade’s housing boom.”

I believe we will see lower home sales if prices keep rising faster than wage growth, and the next housing bust will be characterized by very low sales volumes.

The accuracy of Carvacho-Burgos’ prediction depends on whether the job market continues to strengthen and if gas prices, which have bottomed after reaching record lows, will remain in check.

Gas prices have little or no impact on home sales because the price of gas does not impact financing in any way. Mentioning gas prices gives the forecaster a false excuse if the optimistic forecast doesn’t come to pass. Providing plausible but meaningless caveats is critical to the long-term success of any economist.Ben-Bernanke-Las_Vegas

“We are more optimistic in part because we are expecting the strong rebound to continue and for there to be an increase in residential construction activity,” he said in an interview, adding that markets that were particularly hard hit during the Great Recession such as Las Vegas and Florida are improving by reducing sales of foreclosed inventories.

Which came first the optimism or the expectation of a strong rebound? And what evidence does he have of either one?

Carvacho-Burgos also argues that the decline in oil prices isn’t having a significant impact on either the overall Texas economy or its real estate market. Indeed, Dallas real estate hasn’t been this strong since the 1980s.

Signs of the housing rebound abound. Indianapolis was the only one of the nation’s 35 largest metropolitan areas to post a decline in home values in December. Many communities, such as Denver, Houston, Atlanta and Orlando posted double-digit increases, according to real estate information service Zillow. A flood of foreign capital is flowing into real estate in New York City, and markets in other cities such as Washington, D.C., and Boston also are on a roll.

Even Detroit, which earned headlines because of its huge problem with abandoned properties, is seeing reason for optimism.

Some real estate observers have declared 2015 to be a “buyer’s year.”

Anyone optimistic on every market is drinking too much kool aid.

an-inconvenient-truth

“In 2015, we expect the progress begun last year to continue as market conditions that had been tilted almost exclusively toward home sellers begin to shift back to buyers,” Zillow says on its website. “More first-time and millennial buyers will enter the market as they begin to marry and have children en masse, and as persistently high rents force more to consider the relative stability and value of homeownership.”

The great false hope of 2015 is the Millennial buyer, replacing the boomerang buyer, which was the false hope of 2013 and 2014.Lawrence_Yun_bullshit

The National Association of Realtors, which sees existing-home sales rising 6.6 percent in 2015, notes that many first-time buyers are being kept out of the market because of stringent credit standards, according to Chief Economist Lawrence Yun. He expects new-home sales to jump 34 percent.

“Home values are rising faster than peoples’ income, and that’s affecting affordability,” Yun said in an interview. …

Quoting Lawrence Yun or any realtor is not a credibility builder.

Barclay’s economist Michael Gapen told CBS MoneyWatch that housing sales have already surged 25 percent in recent years and are now reaching a more normalized annual level of 5.4 million. He expects an increase of 4.2 percent in existing-home sales.”It’s suggestive of less upward momentum,” he said. ” I just don’t feel a need to push the number higher.”

As Barry would note, apparently he isn’t feeling particularly puckish.

economic_forecast

I’m not so optimistic

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, 2014, 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.

On January 7, 2015, I published the post, Bold California housing market predictions for 2015. 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.


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