Checking Up on Goldman’s Bearish 2010 Two-Year Forecast

Readers may recall the following prediction from Goldman Sachs in June 2010: Goldman: Seattle Home Prices to Fall 22% More by 2012

Following their earlier collapse, house prices appear caught in a cross current. On the one hand, there are indications that prices may have bottomed. While alternative house price indices differ in details, they generally show that house prices have stabilized since early 2009.

We predict the largest house price declines for Las Vegas, Seattle and Portland (Exhibit 6). While high home vacancy rates and steeply rising delinquencies are expected to push down prices in all three areas, some interesting differences emerge. Price declines in Las Vegas are projected to be front loaded, as negative price momentum and excess supply lead to near-term price declines, before valuation undershoots sufficiently to push up prices. For Seattle and Portland, the model projects back-loaded price declines as house prices currently look overvalued.

Here was my response at the time:

I don’t have a PhD in finance, and I haven’t constructed a 6-variable model of home prices, but my estimates have been for only another 10-15% decline in Seattle area home prices, so I was a bit surprised to see such a dramatic call from Goldman.

Now that 2012 is nearing a close, let’s see who was more accurate.

At the time this prediction was made (June 2010), the Case-Shiller Home Price Index for Seattle stood at 146.83. At its lowest point this year (February) it was 128.99. That’s a drop of 12.2%—almost dead center of my 10%-15% prediction and nearly ten points less than Goldman’s call.

I don’t know how Goldman Sachs’ house price model managed to suggest such a large drop, but local economic fundamentals did not support another 22% drop between 2010 and 2012 any more than they suggested continued home price increases in 2007.

Sometimes there is such a thing as over analyzing a problem.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

23 comments:

  1. 1
    softwarengineer says:

    Yes Tim

    I’d add too; during you article’s timeframe its been a witches brew of robo-signing legal fights, concurrent delayed evictions [some as long as 4 years according to Kary and much cases still on-going], etc, etc….unpredictable [IMO] recent legal quagmires in the foreclosed administration areas [which your website Seattle Bubble has ferretted out quite well I’d add]….much of the root cause was that NY AG case against several of our nation’s big bank FC’d lenders earlier this year, litigation that impacted the whole country too, Seattle area included.

    When will it all settle and how to read the local house price tea leaves in the next few years; when there’s legal litigation going on and big banks like B & A getting sued for a billion dollars by the feds recently? Lord only knows.

    The other anomaly I bring up and many here at Seattle Bubble are quiet about, is delays in the FC units damaging them….if you’re living rent free and don’t know when you’ll be booted, why would you keep the place up or even try not to degrade it?

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  2. 2

    What I’m more curious about is where you’ve been monumentally wrong, Tim. I can’t think of any examples, and maybe there aren’t any. But most of us(except for Kary) have made predictions that didn’t turn out to be even close to correct. I was on my high horse as early as the spring of ’06, telling people that home prices were about to dive. I was right, but about 18 months too early.

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  3. 3

    RE: softwarengineer @ 1
    The banks are at least doing cosmetic repairs and cleaning these days, unlike what they were doing a year or two ago. You should have seen some of the disgusting foreclosure properties I went into then. Big piles of moldy clothes. A pot of moldy spaghetti on the stove. Meat, stinking to high heaven, on the kitchen floor. These were bank owned. Even one of the nice foreclosure homes, a beautiful home I represented buyers on successfully, had all the fancy light fixtures missing. They were in the listing photos a couple of years earlier, but I guess when you’re being foreclosed on, you take what you can.

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  4. 4
    The Tim says:

    By Ira Sacharoff @ 2:

    What I’m more curious about is where you’ve been monumentally wrong, Tim. I can’t think of any examples, and maybe there aren’t any.

    Don’t have a link handy but I’m pretty sure that on more than one occasion in 2009-2010 I said something like “interest rates can’t go any lower.” Big wiff and a miss on that one.

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  5. 5
    Tim McB says:

    I’m a little too lazy to look it up, but anyone know how Goldman Sachs did predicting the other 19 markets? I think they were way off on Phoenix and Vegas as well.

    To be fair to GS I don’t think they were predicting 3.5% or lower 30 year fixed interest rates either.

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  6. 6
    ray pepper says:

    nobody calculated the amount of Fed Intervention there would be to artificially prop up the housing market in the short term

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  7. 7

    To bad this isn’t Italy–we could prosecute GS for bad predictions!

    http://www.huffingtonpost.com/paul-raeburn/italian-scientists-convic_b_2006864.html

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  8. 8
    Jeff says:

    RE: Tim McB @ 5 – If you’re too lazy to look it up then you probably don’t deserve to find out. What are we, your personal assistants?

    Rate this comment: Thumb up 0

  9. 9

    RE: Kary L. Krismer @ 7
    We could probably get them for a lot of other things before we’d go after them for bad predictions. If this were Iceland, they’d have been jailed.

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  10. 10

    RE: The Tim @ 4
    I was dead wrong on interest rates too. And about certain neighborhood’s transformations( ” Burien is the next Ballard.”) Maybe I was just too early on that one. And I’m still maintaining my ” White Center is the next Georgetown.”

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  11. 11
    Pegasus says:

    RE: Kary L. Krismer @ 7 – Just prosecuting GS for fraud would be a start but unlike Italy we refuse to prosecute the big name fraudsters.

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  12. 12
    Scotsman says:

    It’s hard to play the prediction game when the government and Fed keep changing the rules. By announcing that interest rates would be kept low ( essentially 0) through first 2013, then “as long as necessary” the Fed threw housing prices into suspended animation. We’ve been here long enough that many people have forgotten what put us here in the first place. The “new normal” has begun to feel like real stability when of course it isn’t even close. Soon enough an unexpected event will topple the house of cards we now take for granted.

    As for Tim always being right- let’s check with his wife . . .

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  13. 13
    Ron says:

    no offense, but sometimes a WAG is right

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  14. 14
    GrizzlyBear says:

    I grossly underestimated the level of stupidity and corruption at the Federal Reserve as well as the government at both state and federal levels. I did not believe they would mortgage everything on high house prices. I was wrong. They are hell bent on not letting the needed correction happen. I have been through northern NV, and there are empty homes on every street which are bank owned and not listed for sale. They just sit, and sit, and sit. It’s all a big lie.

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  15. 15
    whatsmyname says:

    So Tim, now comes the obvious question:
    Where do you see Seattle prices after the next 8 quarters?

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  16. 16
    Lo Ball Jones says:

    Have you checked out the new Preforeclosure filter on Zillow?

    The shadow inventory now has a bright light on it.

    Factor those babies in, and you might make some GS quant happy.

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  17. 17
    Jonness says:

    Sometimes there is such a thing as over analyzing a problem.

    I recently predicted Bernanke would succeed in engineering an even lower rate in order to trick more people into believing we have achieved a bottom. The current 3.125% 30-year fixed is acting like a housing market stimulus. The problem is, we’ve already witnessed what happens to house prices the moment the stimulus sugar runs out of the the tank.

    IMO, it’s far to early to be claiming victory. The economy is being propped up by $1 trillion+/yr in borrowed money, most of which is financed by Bernanke’s magic printing press. It’s no secret this is unsustainable. IMO, the economy is currently far more risky and far more scary than it was in 2008/2009.

    Apparently, I’m one of only a few people left on earth who doesn’t worship Ben Bernanke as the ultimate anti-Christ. Here’s why: The moment those printing presses are switched off, we will experience massive economic catastrophe. Thus, the default behavior will forever be to attempt to print our way out. Unfortunately, this will not work.

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  18. 18
    Feedback says:

    Tim, you just outsmarted Goldman Sachs! I’m very impressed. Shouldn’t you be working for them?

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  19. 19
    Blurtman says:

    It is amazing that anyone would lend credibity to anything that Goldman Sachs says. They are a criminal enterprise. Lender Processing Services (LPS) – a criminal enterprise. Moody’s and Standard & Poor’s – criminally negligent and complicit in fraud.

    It is as if Al Capone Liquor Importers were to be used as a spokeperson for effective prohibition controls.

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  20. 20
    Al says:

    RE: softwarengineer @ 1

    Even so, SFR units aren’t quickly consumed goods like crude oil and corn. Temporary stops in supply will have some effect, but home buyers are making judgements that cover many years.

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  21. 21

    By Blurtman @ 19:

    It is amazing that anyone would lend credibity to anything that Goldman Sachs says. They are a criminal enterprise. Lender Processing Services (LPS) – a criminal enterprise. Moody’s and Standard & Poor’s – criminally negligent and complicit in fraud.

    It is as if Al Capone Liquor Importers were to be used as a spokeperson for effective prohibition controls.

    Mr Fox, I’d like to introduce you to Mr. Henhouse.

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  22. 22
    Joem says:

    RE: Feedback @ 18

    “Feedback” as a moniker is a good bet for a troll on any website.

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  23. 23

    […] Goldman’s 22% drop prediction was closer if the nasty inflation wasn’t […]

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