Tuesday, January 02, 2007

Will CAR get it right in 2007?

In my opinion, not likely. Economic forecasters, not only amongst the California Association of Realtors, but everywhere, have proven time and time again that they simply don't have the tools to predict trend changes, so they "forecast" by predicting a little more of what just happened. As long as the trend is in place, you look like a genius just saying we're going to have more of the same. CAR practically admits it in one statement in its late-2005 forecast for 2006:

So what lies in store for 2006? The market and economic conditions that gave rise to an outstanding 2005 performance will generally prevail again in the year to come and contribute to another very good year...

I do not understand why CAR viewed the housing market conditions as so good, with their "cautious optimism", while affordability rates remain at such depressing lows. Why is that a reason to be optimistic? Isn't CAR concerned that census demographic movement trends are now showing a net outflow from California? Not only were ex-Californians frustrated at housing costs, even the illegal immigrants can't take it anymore! If people are net leaving the state, who is going to ride in on his big white horse and support the current bubbleminium prices?

What else did CAR say in late 2005? CAR did reissue a more subdued forecast midyear, but let's see what they were saying back in late 2005:

While the unsold inventory index is expected to increase somewhat in 2006, current inventory levels will remain lean enough to drive continued price appreciation in the year ahead. Meanwhile, new home building will again fall short of household growth in 2006, resulting in a long-run housing shortfall that will contribute further to higher home prices.
All in all, sales in 2006 are expected to decline by 2 percent to 622,300 units, still very strong by historic standards.

OK, those were the parts that CAR got sensationally wrong. Some parts of the 2006 forecast were correct, like the rise in the state median home price, though I think the actual price has overshot CAR's forecast. Even though the actual median price did not match, they were correct in predicting an upward trend for the state median home price. We know, however, that home prices are seriously cracking in an increasing number of areas.

So what is CAR saying for 2007? Home prices will decline 2% in 2007. Well gee, that sounds like a can't-miss prediction because that's recently what has happened in places like San Diego and Ventura counties. Sales are expected to decrease 7% - any decline is not expected to be as steep as what occurred in 2006, CAR says. But CAR wasn't really expecting a major sales decline in 2006, was it! And oh! The market is stabilizing!

We'll reassess things 12 months from now and see how CAR does. My opinion on what will happen in 2007 may be all wet too, but at least I won't tell you we're just going to have a little more of the same.

And by the way, Happy New Year!


Blogger bearmaster said...

I will probably put up December charts on Friday night or next weekend. I want to make sure all the December sales get logged.

Sales have rebounded a bit in a few well to do zip codes (e.g., 90277) but since average prices are down, total dollar volume transacted remains down. The "more affordable" areas are still doing better on a relative basis and hanging on, like a bulldog biting a shoe.

This market has reminded me of watching a leaf fall from a tree. You see the leaf sway and rock back and forth in the air as it gradually works its way down to the ground. While some indicators of market strength (e.g., sales volume) are weak, other indicators (e.g., prices) continue to rise. Then when prices are weak, sales rise, though not to the levels sales were at before. The leaf is working its way down.

1:00 PM, January 02, 2007  

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