The Perils Of Looking Toward The Future

I write for a hundred and some odd newspapers and as a result get a ton of questions from both consumers and brokers. Among the most popular inquiries are queries which go something like this: “So tell me, when will the market begin to go up, when will home prices stop falling and is now the time to buy.” I would dearly love to answer such questions with great specificity but there are two problems.

First, I have no idea where markets are headed. Second, neither does anyone else. The first point should be fairly obvious. Honest, I have no clue. I can’t tell you the future prices of homes on my block, much less the value of homes anywhere else. But the second point is not so clear.

Wall Street, for example, repeatedly tells us that past performance does not guarantee future results — and then proceeds to issue forecast after forecast explaining in great detail why one stock or another will reach a specific price by a specific date. Surely if there can be no guarantee of future results, then making financial decisions on the basis of forecasts from analysts hardly seems like a strategy to be encouraged. Just ask all those happy Enron investors.

NO GUARANTEES

Alas, crystal ball gazing is not confined to Wall Street. In real estate we also have our share of prognostications. In 2005, for example, when the real estate market was booming, the chief economists from Fannie Mae, Freddie Mac, the National Association of Realtors ®, the National Association of Home Builders and the Independent Community Bankers of America jointly wrote a study which said “home price appreciation should average around 5 percent per year from 2004- 2013, but could be above 6 percent if supply constraints continue to tighten.”

(See: “America’s Home Forecast: The Next Decade for Housing and Mortgage Finance”) How come? Our five economic insiders explained that “a stable relationship between income and house prices over time argues against any nationwide “housing bubble.” With the national unemployment rate below 6 percent (and falling), extremely low mortgage rates and economic growth accelerating, the likelihood of a decline in home prices at the national level is quite remote.

Even at a local level, demand-supply conditions today are such that there are few, if any, markets that exhibit bubble characteristics.”

THE THINKERS SPEAK

The 2005 paper follows a long tradition of eminent thinkers with an interest in housing trends. In 1988, for example, economists N. Gregory Mankiw and David N. Weil said “it appears that the real price of housing will fall about 3 percent a year.” (See: “The Baby Boom, The Baby Bust, and the Housing Market”) “The entry of the Baby Boom generation into its house-buying years,” said our two economists, “is found to be the major cause of the increase in real housing prices in the 1970s.

Since the Baby Bust generation is now entering its house-buying years, housing demand will grow more slowly in the l990s than in any time in the past forty years. If the historical relation between housing demand and housing prices continues into the future, real housing prices will fall substantially over the next two decades.” Dr. Mankiw, of course, went on to become chairman of the Council of Economic Advisers under President Bush in 2003.

PREDICTIONS ABOUND

When it comes to real estate predictions it would be difficult to beat 2007. A truly vintage year, we had the chairman of the Federal Reserve, Ben Bernanke, informing us in May that “given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,”.

Not to be outdone, the then-chairman of the Mortgage Bankers Association, John Robbins, told the National Press Club that worries about the mortgage meltdown were plainly off base: “As we can clearly see, this is not a macroeconomic event. No seismic financial occurrence is about to overwhelm the U.S. economy.” Not all predictions, of course, have elicited much public attention.

In 2005 the Financial Accounting Standards Board (FASB) looked at the toxic mortgages then being popularized and modestly pointed out that the huge payment increases associated with option ARMs, negative amortizing, deferred interest and interest-only loans “could affect a borrower’s ability to repay the loan and lead to increased defaults and losses.” (See: FASB Staff Position Paper, SOP 94-6-1)

NO-ONE’S LISTENING

Alas, as my father — a CPA until almost age 90 — could have explained, no one listens to accountants when revenues are rising. So, if you really want to know where home values are headed and when the present market will turn, don’t ask me. I don’t have a clue — and I’m not alone.