| Top Economists Sound Like Broken Record Regarding Housing Outlook |
| Written by Jonathan Smoke | |
| 09.11.2008 | |
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Discuss this article on the forums. (0 posts) Yesterday I had the privilege of attending the S&P – CME Group Housing Forum in New York. The event was open to the financial and housing community and it drew a crowd of over 400 to listen to some of the brightest economic and financial minds focused on housing and housing derivatives.  There were four main sessions at the forum, which provided insights and ideas that could fill this blog for the next month. Today I’m going to focus on the key ideas I took away from the first session, which featured four top economists with very informed views of housing.The “Outlook for the US Housing Market” forum was moderated by David Blitzer, who chairs the index committee at S&P. Three other economists first shared their current and forecasted views of the housing market and then spent time answering insightful questions from the audience. First up was Mark Zandi, Chief Economist at Moody’s economy.com. Zandi got things started by saying that the bottom of the downturn is in view. From his perspective, sales have hit bottom, and starts will hit bottom in the next six months. On the home price front, Zandi expects we have a bit further to go relative to the reading provided by the national composite of the S&P Case-Shiller index. Zandi said that while price to income ratios have come back in line with long term trends, the ratio of prices to rent is still out of balance with an estimated 5-10% resulting further fall in prices needed to get it back into the long term trend. With a smile and clear humor implied, Zandi confidently extolled that prices will bottom next summer—precisely on June 15, 2009. While we can start making plans for the end of the downturn, Zandi was less sanguine about where we go next. He noted that prices won’t rise appreciably until inventories are worked off. Zandi estimates we have approximately one million excess inventory units, and that based on demand estimates driven by household formation, it will take until the summer of 2010 for the market to be back to a healthy supply and demand equilibrium condition. Therefore, prices won’t start appreciating in aggregate until we reach that point of equilibrium. Zandi also noted that the risks to his forecast are still to the downside, but that risks are appreciably less now than one week ago as a result of the Treasury intervention into the GSEs. He sees mortgage rates at 6% and more credit available as a result of this change as early as the end of this year or early next year. The next economist to speak was Beth Ann Bovino, a senior economist at S&P. Keying off of Zandi’s humor, Bovino told the crowd that the bottom would be in the evening, not the morning, of June 15, 2009. “The good news,” Bovino said, “is that a lot of the damage has been done.” Her view is that sales are seeing the bottom, but starts and prices likely have another 10% decline to come. Bovino also described the bottom as being a trough, implying the housing market will tread water for some time. Her view was that the end result will be that home prices will have fallen nationally by 29-30% peak to trough. Charles Himmelberg, US Credit Strategist at Goldman Sachs echoed a similar outlook. Using a guideline based on affordability, Himmelberg believes that prices need to fall 25% and so far we’ve shed 20%. Like Zandi, Himmelberg sees the actions to take over and shore up the GSEs as very positive for affordability and therefore housing. I was struck by how similar these three economists’ views were, and I loved a comment by Himmelberg regarding their common views. “When economists have no idea what may happen, they hide behind the same view,” Himmelberg joked. I also appreciated Himmelberg’s candor about these confident assessments of exactly how much further prices “need to fall.” Many of these projections are based on affordability, yet he admitted that there’s limited evidence of correlation of home prices to affordability. Zandi wasn’t worried about their singular view of where prices would end up. “It’s encouraging that most [economists] agree that prices will settle at a peak to trough decline of 30%,” he said. All three had fairly negative views of the current overall U.S. economy. Zandi and Bovino both said that they believe the US economy has been in a recession since late 2007. Zandi added that he expects unemployment to continue to rise, peaking at 7% in early 2009. And, like their economic views, all three had positive views of the actions the government took over the weekend to take over Fannie Mae and Freddie Mac. “For the foreseeable future, the federal government will be our nation’s mortgage lender,” Zandi commented. So the view is somewhat positive. We have come through most of the worst trauma, but there are eerily similar views of the remaining work to be done. The views of inventory make sense as they can be measured, but the time to burn off the inventories is based on today’s depressed demand. From what I am seeing, at least in healthy markets there is sidelined demand that will eventually jump in at relatively the same time, so simple household formations won’t explain the level of sales for several months as sales begin to improve. That should mean that the longer time frames estimated for inventory to be burned off won’t end up as long as expected assuming nothing else catastrophic happens. But I am worried about these matter-of-fact, precise views of where prices “need to fall.” There are useful long term ratios to pay attention to, but affordability can’t be the single guide. If it were, there would be no appreciation in San Francisco until Memphis catches up. These views permeate the common view of where we are and the depressing view of where we are going. Robert Shiller, Yale Economics professor and one of the architects of the S&P Case-Shiller indices, described that a “social contagion” of falsely formed views of the market and where prices were headed was one of the primary causes of the housing bubble in the first place. Isn’t it possible that these same, precise views of how prices will fall are leading to a negative social contagion? Dr. Shiller spoke in a later session at the forum and was also on hand to sign copies of his new book, The Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do about It. I had the pleasure to read the book while sitting in a plane that was 39th in line for take off at La Guardia late last night. I will review it in a later post but for now will share a passage that struck me as being spot-on about the boom and eerily reminiscent of the group think I heard earlier in the day: “The problem is that we can arrive at a situation in which people are generally adopting an excessively optimistic (or excessively pessimistic) view, because they are rationally but mistakenly judging the information that others have. To borrow a term used by economic theorists Sushil Bikhchandani, David Hirshleifer, and Ivo Welch, speculative bubbles may be caused by ‘information cascades.’ An information cascade occurs when those in a group disregard their own independent, individually collected information (which might otherwise encourage them not to subscribe to a boom or other mass belief) because they feel that everyone else simply couldn’t be wrong. And when they disregard their own independent information, and act instead on general information as they perceive it, they squelch their own information. It is no longer available to the group and so does not figure in further collective judgments. Thus, over time, the quality of group information declines. (Shiller, The Subprime Solution, 2008)”
The best forecast is an average of many contrasting views. Where’s the contrast? 
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