The Housing Chronicles Blog: Sometimes economists on housing have no clothes

Friday, April 25, 2008

Sometimes economists on housing have no clothes

In his latest Mortgage Credit News, columnist Lou Barnes takes Dr. Robert Shiller to task for predicting a 30% decline in home prices but offering no specifics:

The media are having a wonderful time mis-reporting housing conditions, ooing and ahhing every time Robert Shiller shouts “Fire!” in the theater. This week he predicted (again) a “30% decline in housing prices.” All of them, Robert? Uniformly? Average? Do the math: if half the nation’s homes stay price-flat, the other half must fall 60%. Is that it? Or did you mean to say decline 30% in a few places? Some individual projects are off more than 60% right now (an FL condo or two... AZ and CA land), but the worst dozen mini-metro areas have yet to decline as much as 20%.
In authentic data, OFHEO found that home prices measured by appraisal and weighted by location (CA more than ND; NY more than AZ and NV combined...) rose .6% from January to February. Sales of existing homes are sliding gently, but still moving at a five million annual clip. Sales of new homes are off 37% in the last year, down to a half-million, but that is good news -- the less new inventory, the better.

That's the problem with economists who try to opine on real estate markets without ever having worked in the trenches. In many cases, they simply don't know what they're talking about and the media, full of over-worked and/or lazy reporters, return to the same feedstock of quotes (i.e., Mark Zandi, Robert Shiller) for a line or two to make their story appear credible. Readers, not knowing any better, then believe it and act accordingly, apparently turning to guns and religion as salves.

But Barnes isn't finished yet with the media:

Yelling “Fire!” is a bad idea, but so is telling the audience to stay seated when smoke is pouring from the ventilator. Headline stories all week long: the Crunch is over, credit markets are improving. Irresponsible nonsense.
Distress is measured by interest rate spreads between safe stuff and not, and availability of credit. We have seen nothing more than a pullback from panic: the 2-year T-note has run up from 1.70% to 2.36%, sensible as the Fed at 2.25% is about to pause its rate cuts (keep some dry powder, guys). The Treasury/junk spread has contracted from no-market 8.6% to merely disastrous 7%. Retail mortgages are still 2.50% above Treasurys, almost a point out of line, and no real market for Jumbos or any other securitized credit. Tax-exempt munis paid 1% over taxable Treasurys last month, and now pay the same -- improving from schizophrenia to clinical depression. The international bank-to-bank Libor spreads are still widening...

Lost in housing and “subprime” myopia, and domestic navel-gazing: the global rise of terrible inflation, nothing like it since the 1970s. $120 oil will have its consequences. Here, wages capped by foreign competition, food and energy inflation is slowing the economy; Asia/Emerging are in a runaway spiral. Recent annualized figures: China 9%, India 7% (doubled in six months), Philippines 6.9%, Vietnam 19.4%, Singapore 6.5%, Russia 12.7%, South Africa 9%, Saudi Arabia 8.7% (highest since the ’82 oil spike).
There are only three antidotes: the mad good fortune of a commodity collapse, or central-bank induced slowdown, or the ultimate violence of market-induced slowdown.

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