Wednesday, October 17, 2007

Forecasting the Housing Market

I was reading the NAR forecast this morning. They say that improvements in the mortgage market will cause a turnaround in the housing market. If I were them, I wouldn't say anything.

I do admire the REALTORs for putting out numbers every month that play it straight down the middle (full disclosure, I helped the group design their benchmarking system: see$FILE/FinalDocumentationForWebsite_reviewed.pdf)
Particularly useful is the pending sales index as well as the month's inventory supply measure.

Both of those numbers are not encouraging at the moment: pending sales continue to decline, and month's supply continues to increase. I understand why people whose business is selling homes do not want to hype these numbers, but for credibility sake, they should avoid making pronouncements that fly in the face of their numbers. REALTORs want to be thought of as professionals, and trusted advisors, rather than sales people. This means telling people about the reality of the market. In fact, if they could use market information to convince sellers that they need to lower their prices (admittedly, a difficult task), they could help the market reach bottom faster.

I am not saying that the market won't recover next year. As Bob Shiller pointed out in his Jackson Hole paper, prices in London began to dip a few years ago, only to start back up soon after. What I am saying is I don't know when the market will begin its recovery--and neither does anyone else.


Morris Davis said...

I think we do know that excess returns to housing in many markets are highly correlated over time.

So, the fact that we have had some bad returns last quarter means, in a statistical sense, we should be likely to see more bad returns in the current quarter. Any reasonable forecast should incorporate this autocorrelation.

In terms of the economics of this forecast -- we had lending standard tightly sharpen last year; thus the pool of buyers qualified to purchase any given house at the old price levels fell. Thus, to reconcile supply and demand at the new lending standards, seems like prices have to fall.

Monty said...

Interesting text. You have a nice blog. Keep it up!

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