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.