More Wild Guesses from Forbes on the Housing Market

Over in the open thread, a reader dropped a link to an amusing article from Forbes: No Double-Dip For Housing

Although the end of the Fed’s purchases will certainly not help the housing market, we do not believe it will result in a “double-dip” for housing or the economy. Instead, we expect home building, home sales and home prices to all be up a year from now vs. where they are today. Not on every street or in every community, but for the nation as a whole.

…we think the battered and bruised housing market is going to be in better shape one year from now than it is today.

When considering predictions from a publication, I think it is worthwhile to investigate how accurate their predictions have been in the past. To that end, I present this Forbes article, from June 2007 (one month before home prices peaked here in Seattle): Most Resilient U.S. Real Estate Markets

When it comes to real estate, the questions on everyone’s lips are: How low is low, and when’s the perfect time to buy back in?

That moment has passed in Seattle and Charlotte—both metros hit bottom in the first quarter of 2006 and have since posted price gains of 12.3% and 6.3%, respectively, according to National Association of Realtors (NAR) data.

Dang, I bet you feel like a chump for missing the Q1 2006 bottom here in Seattle, huh?

In the slideshow attached to the article, Forbes lists 19 markets that “stand the best chance of recovery” as well as predictions about “when the upturn will occur.” Plotted below are the fifteen markets from the slideshow or the article that are also tracked by Case-Shiller, with their forecast bottom marked with a yellow-outlined dot on each line.

Forbes: Bottom Calling is Fun!

Since the chart is a bit crowded, here are their bottom forecasts in table form. The first column is the quarter in which Forbes predicted the market would hit bottom, the second column is the quarter which has seen the lowest prices to date, and the third column is the percentage difference between the real bottom (so far) and the quarter that Forbes predicted would be the bottom. Click a column header to sort by that column.

Market Forbes Actual* Price Diff.
Phoenix 2008-Q4 2009-Q2 -16%
Los Angeles 2008-Q2 2009-Q2 -19%
San Diego 2008-Q2 2009-Q2 -18%
San Francisco 2008-Q2 2009-Q1 -26%
Denver 2008-Q2 2009-Q1 -9%
Washington 2008-Q4 2009-Q1 -5%
Miami 2008-Q1 2009-Q2 -31%
Tampa 2008-Q1 2010-Q1 -24%
Boston 2008-Q1 2009-Q1 -8%
Detroit 2007-Q3 2009-Q2 -37%
Minneapolis 2008-Q2 2009-Q2 -23%
Charlotte 2006-Q1 2010-Q1 -4%
Las Vegas 2009-Q2 2010-Q1 -3%
New York 2009-Q1 2009-Q2 -2%
Seattle 2006-Q1 2010-Q1 -14%
*so far

On average, Forbes’ June 2007 bottom calls have been 17 months early, and prices have fallen 16% between their forecast bottom and the lowest post-peak price (to date). Their worst prediction in terms of price variance has been Detroit, where prices have fallen 37% since their “bottom.” Their closest guess was New York, where they were off by just one quarter and only 2%. Of course, then there’s Seattle and Charlotte, where prices are still hitting new lows in Q1 2010, despite Forbes’ hindsight call that they had hit bottom in Q1 2006.

In other words, Forbes’ predictions regarding the housing market have been about as accurate as a blindfolded, dart-throwing monkey.

So how much stock should we put in a prediction from Forbes that there will be “no double-dip for housing”? I’d say something close to zero.

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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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

40 comments:

  1. 1

    Excellent Charts Tim

    Yes, the sources’ track records should be analyzed carefully before using the source as investment advice. Also, when bad advice is given, a good news source will quickly admit it’s horrifying mistake and corrective action(s) plans needed to prevent it in the future.

  2. 2
    BillE says:

    “In other words, Forbes’ predictions regarding the housing market have been about as accurate as a blindfolded, dart-throwing monkey.”

    Or, as accurate as the NAR’s chief economist.

  3. 3
    Buddhamind says:

    That’s excellent that you are taking the time to check the mainstream media on their “objective” reporting. I think it’s equally important to always check 1) who owns or controls the media outlet, and 2) what the owner or controllers’ political affiliations are — that is, what private thinktanks do they belong to, and what are the long-term political goals of those thinktanks.

    The Average American will not make this paradigm shift in their thinking on their own, It generally takes several years before Americans begin thinking about a topic or an approach in a different light. So it will be with how Americans determine which news is accurate. By the time they figure it out, they will broke.

    WIthout accurate news, it’s easy to manipulate people and take their money (i.e., make it appear as if Fate wasn’t in their favor, and they merely “lost” their money). This is why it’s so important to identify accurate and inaccurate reporting — especially reporting on financial and economic issues.

    Peace and namaste.

  4. 4
    Scotsman says:

    RE: BillE @ 2

    ” about as accurate as a blindfolded, dart-throwing monkey.”

    Hang on now- this “monkey” (chance) has has pretty good track record, that is, if it’s the same monkey that purportedly beats Cramer in total expected returns over the last several years.

    “Based on subsequent stock market performance and our judgments about his forecasts for overall stock market direction, Jim Cramer is right about 46% of the time with his stock market predictions, slightly below average. His forecast sample size is moderate, as is our confidence in this conclusion.”

    http://www.cxoadvisory.com/individual-gurus/jim-cramer/

  5. 5
    Buddhamind says:

    One additional thought — having worked in the prediction business for some time, let me just say that the vast majority of analysts are terrible with their ability to predict. Most financial and market analysts are never trained in technical analysis of charts and market data, which means they are never educated in how to use the best tools available to develop predictive algorithms.

    In fact, technical analysis is actively treated as “Voodoo witchcraft” by most people in the industry. Few actually explore it on their own to make this decison on their own experience — they simply regurgitate what they have been told by others.

    This means that the vast majority of market “experts” are generally talking out of their ass and wasting your time.

    It is much more efficient and easier to identify the true market experts by their previous ability to predict. Then all you need to do is ignore the rest of the “experts” once you know which ones actually have a system that is predictive. I am amazed you waste your own blog space mentioning Forbes, or ridiculing them, for example. It is much better to simply give attention to those who are predictive.

    Let me give you some help, since I have been doing this for some time… The most accurate market trader I am aware of, who posts his prediction for free online, is 24-year-old John Lee at http://ibankcoin.com/chart_addict/. Who else do you know who routinely makes 800% profits in the stock market each year, and freely posts all of their trades to prove it? You will find no others to compete with him. Period. End of story.

    I am looking for similar individuals who make exceptional real estate market predictions. Rather than read about Forbes and the zillions who are crappy at their own craft — which ones are actually accurate?

    Thank you.

  6. 6
    Scotsman says:

    A friend of mine said his mother heard from a neighbor that their son was involved in a bidding war on a Greenlake condo. It finally sold for 2% over asking.

    This must be the bottom! It’s going to be a great year for real estate! /sarc

  7. 7
    D. in Ballard says:

    I guess I don’t know what “double dip” means, but I’m interpreting it to mean that prices may fall but not catastrophically. Interpreting it that way I would have to agree that we’re probably not in for a double-dip. I don’t think that’s too radical a prediction for Forbes to make. As for my basis for this assumption? I can’t really point to any one thing other than the fact that for whatever reason people continue to buy houses at high prices.

  8. 8
    Buddhamind says:

    RE: Buddhamind @ 5

    I’ve noticed that Gerald Celente is fairly accurate in his predictions, except his best content requires a subscription. Why not mention him in your next blog post? Any others worth mentioning?

  9. 9
    LA Relo says:

    All the more reason why I don’t expect to see a bottom until they STOP calling one.

  10. 10
    ray pepper says:

    The only one who I personally know who NAILED A BOTTOM was Mark Haines from CNBC. Its now known as the Haines bottom and it was discussed on March 10, 2009 with the goddess Erin Burnett.

    Can we phone a friend and ask Mark if this is the bottom. Better yet, forget Mark….Call Erin and ask her if she likes bald-headed brokers……

    http://www.financems.com/mark-haines-cnbc-31009-haines-bottom.html

    http://www.whosdatedwho.com/celebrity/photos/erin-burnett.htm

  11. 11
    willcasp says:

    RE: Buddhamind @ 5
    I would not confuse the combination of dumb luck and the bell curve for brilliant charting voodoo and the ability to predict a market.

    Having mountains of data about the past and current information may give you an edge on what do to today and tomorrow, but it doesn’t tell you much about a few weeks out and beyond.

  12. 12

    RE: Scotsman @ 4
    About six months ago, an article in Barron’s took Cramer’s buy recommendations, and studied what would have happened if you took those stocks and sold them short the day of the broadcast. What would have happened is that by betting the opposite of what Cramer recommended, you’d have made a ton of money.

  13. 13
    derek says:

    RE: Scotsman @ 4

    My thoughts exactly. You get enough blind-folded monkeys, and one of them will definitely hit the bullseye.

    The same could also be true of mutual fund managers.

  14. 14
    David Losh says:

    RE: Buddhamind @ 5

    The biggest problem, today, with Real Estate predictions is the run up in pricing between 2005 to 2007. I stood one day in the summer of 2006 with a Real Estate agent who said the market was unsustainable. We both agreed. That was a time for seller to sell, sell, sell. The same is true today.

    What’s amazing is the number of buyers who will step up and over pay for a property.

    You can not predict human behavior. You can know the price a property should sell for, then a herd of idiots comes along to prove you wrong.

  15. 15
    Hugh Dominic says:

    RE: D. in Ballard @ 7 – The generally accepted definition of a bottom is a point in time where the inflation-adjusted median price does not fall more than 5% from that point within the ensuing 7 years. A peak is the opposite – never rising above +5% within 7 years.

    A double-dip is two of those.

  16. 16
    Scotsman says:

    RE: Ira Sacharoff @ 12

    Yup, there is an active group that treats his recommendations as counter-indicators. And there is some logic to it- many feel he’s still a shill for his industry insider friends who use his ability to move individual stocks as trading opportunities, but more often than not play the counter trend.

    Personally, i don’t know why anyone would trust the recommendations of an insider who has admitted to willfully manipulating markets. Why people feel they can trust a guy who has a record of illegally manipulating markets escapes me. It’s like trusting Tiger woods when he tells you all his affairs have been outed. Oops!

    http://www.radaronline.com/exclusives/2010/04/tiger-woods-slept-neighbors-daughter

  17. 17
    Hugh Dominic says:

    Forbes should have sold an investment based on that 2006 prediction. I would have called it the Forbes 15 Most Likely to Rebound RE Index.

    Naturally it would be leveraged 4:1 because as we all know, housing is such a good investment, you only want to put 20% of your own capital into it while earning the full 5x return.

    My Fund’s investment strategy would be to put the Fund’s money to work in each of the 15 markets as of the predicted bottom date, using RE pre-purchases, options, and whatnot. For example let’s say the Fund raised $150M in investment capital. I would invest $10M in each market, but with 4:1 leverage.

    I just ran the numbers based on Tim’s chart. The original $150M in the fund would now be worth $30.5M. So if you invested $10,000 in 2006 on this method of betting on Forbes’ bottom calling, you would now have about $2,000.

  18. 18
    andymiami says:

    from the person who has tried really hard to stabilize housing prices, our esteemed Ben Bernanke, in a speech in Dallas today. ”We have yet to see evidence of a sustained recovery in the housing market,” The link to the CNBC article…http://www.cnbc.com/id/36227613

  19. 19
    David Losh says:

    RE: andymiami @ 18

    I want to make a distinction between a housing recovery, low interest rates, and the demise of Mortgage Backed Securities.

    If you invest in Real Estate, even buying a personal residence, you’re going to want to be sure the property will rent for the mortgage payment. The value of the property needs to be at a price that is realistic for resale.

    I know that I’m a broken record on these points, but what Bernanke is saying is that there is nothing the Fed can do to create future equity in a property. All the tricks have been played. The wad is shot, no mas.

    More importantly loans are going to need to meet the test for income. The face value of the Note will need to be realistic. The back end cash flow, in my opinion, will be drying up with more loans being held as interest income in a portfolio. I just don’t see some risk manager sitting in a meeting talking mortgage securities for a very long time.

    A recovery is years off. We need to shed a ton of equity out of property before there is an upside to owning.

  20. 20
    Daniel says:

    A while back I saw a photo from a book store who put one of Cramer’s books right next to a book called something like (not the exact title) “ten ways to spot a con artist”. The subtitle claimed Cramer would receive a score of 7 out of ten.

  21. 21
    Daniel says:

    By Buddhamind @ 5:

    In fact, technical analysis is actively treated as “Voodoo witchcraft” by most people in the industry. Few actually explore it on their own to make this decison on their own experience — they simply regurgitate what they have been told by others.

    Let me ask you a question: No matter which type of method to predict future behavior, earn money off market inefficiency, etc.: if all the big players on the market use the same type of methods, at what point will these systems chase the results of their own trading, trigger each other and result in a strongly coupled system?

    In a world of probabilities, the unlikely event will ruin those who are to greedy. We should have not bailed them out. After all their profits exclusively come from other market participants.

  22. 22
    The_Dude_Abides says:

    By BillE @ 2:

    “In other words, Forbesâ�� predictions regarding the housing market have been about as accurate as a blindfolded, dart-throwing monkey.”

    …sounds like you read Malkien’s ‘A Random Walk Down Wall Street’.

  23. 23
    buystocks says:

    RE: Buddhamind @ 8
    If you take a million people, and they flip a coin 15 times:
    30 of those people will get heads every time
    Important to note that during the next flip, those 30 people still only have a 50% chance of getting heads.

  24. 24
    Scotsman says:

    RE: buystocks @ 23

    As an aside, recent research has shown that there is an ever-so-slight advantage to getting heads, something about the distribution of mass in the coin faces. I forget the number, it’s absolutely minute, but statistically significant.

  25. 25
    Daniel says:

    By Scotsman @ 24:

    As an aside, recent research has shown that there is an ever-so-slight advantage to getting heads, something about the distribution of mass in the coin faces. I forget the number, it’s absolutely minute, but statistically significant.

    Is that flipping the coin with a machine or having different people flip the coins? If it was the first I would not be surprised.

  26. 26
    buystocks says:

    RE: Scotsman @ 24
    here’s a page discussing coin tossing strategies:
    http://www.freerepublic.com/focus/chat/2324868/posts

  27. 27
    David Losh says:

    RE: Daniel @ 21

    “After all their profits exclusively come from other market participants.”

    One word, “ETrade.”

    In the world of finance it’s not what you know it’s who you know. Martha Stewart was an industry outsider who got caught for being an amateur. In Paul Allen’s office there is one woman who handles his personal life. If there is a leak to what he is thinking there is one person to blame.

    Phone calls, travel plans, reading material, or conversations can all be tracked, to get an idea of where investment dollars may go next. Cramer is the perfect example of some one who dispenses false information with just enough truth to keep people hooked. It is all rigged. A few billion here, a pension fund investment there, a group of financial wizards, or an orchestrated debut of a new patent approval, it’s all information that manipulates stock prices.

    Gold is what fascinates me right now, because it is cheap. When you compare gold to what stock prices are, adjusted for inflation, it’s cheap! It’s gone up through the roof, but comparatively it’s cheap.

    Normally that’s why I liked Real Estate. Now what I’m liking more is manufacturing. We are in services now, but I would like to manufacture, and I really like the price of steel. Investing even in bird houses makes more sense than dumping money into stocks. Unless you have a boat load of money to lose, the risk far out weighs the rewards.

    On the other hand, if you do have a few billion, I think the chances are you can create the appearance of making stocks move in your favor.

  28. 28
    One Eyed Man says:

    RE: buystocks @ 26

    This comment has to do with physics so skip it if you’re only interested in real estate.

    Thanks buystocks. This is physics not real estate and most people here won’t care about it, But I’m curious if any of the statistics freaks actually read the 30 page research paper and agree with my basic understandeing of it. I skimmed it. I don’t care much about the odds, but I’m always intrigued by how someone has modelled the physics with mathmatics to reach their conclusion. I believe their conclusion related to the fact that a coin is often flipped off center and has a precession (kind of a wobble). A magician can actually create the wobble without causing the coin to flip all the way over thus making what looks like a flipped coin stay heads up through the entire toss (sort of like a coin rolling around on its rim as it settles on the table top after being spin in place).

    I don’t think that the linked article accurately described the physics and the mathematical conclusions as discussed in the research paper. I didn’t thoroughly read and analyze the article(at this point in life the math is beyond my current skills without significant effort) but I believe in qualitative terms It says for a flip and catch (no bounce) the angle of momentum with regard to the center of the coin and direction of the flip can cause a precession (wobble) in the axis of the spin. That wobble can cause the coin to spend more time during the toss with the initial side up during each full rotation. The result is that the chance of the coin landing on the initial side is greater than 50%.

    They also concluded that weighting one side of a coin will not affect the odds in the catch and flip scenario, but it will if you spin the coin on the table.

    I don’t know if anyone else appreciates that stuff enough to read it, but I’d be curious to know if anyone did and if they agree or disagree with me. I miss AMS at times like this cause he would have been interested enough in the physics to have read it and voice an opinion even though its not real estate. Sorry The Tim if this violates comment policy.

  29. 29
    Daniel says:

    RE: One Eyed Man @ 28 – I skimmed it and came to the conclusion (before I read that they admit that) that their whole analysis breaks down in the presence of large enough friction. I actually would be surprised if an analytic solution has been found for the general case.

  30. 30
    Daniel says:

    By David Losh @ 27:

    RE: Daniel @ 21

    “After all their profits exclusively come from other market participants.”

    One word, “ETrade.”

    What do you want to say with this? Among others all those amateur Etraders are what finances banks profits. Or do you have a Teraflop computer next to the stock exchange to compete with their automated trading?

  31. 31
    Scotsman says:

    RE: Daniel @ 29RE: One Eyed Man @ 28

    I hadn’t seen this before, but just skimmed it.

    It seems there are three different discussions going on- those that relate to the structure and balance/c.g. of the coin, those that relate to the flipping technique and an ability to influence the number/timing of inversions, and finally those that relate to the nature of randomness or chance. The first two are based on known classical physics and seem reasonable if you accept the stated conditions. But I have also seen one analysis that builds on the notion that randomness isn’t really random, and that one can expect breakdowns in the laws of probability as commonly accepted. The math was too intense for me, but the conclusion was interesting to ponder. More and more we seem to be discovering that there are glitches or imperfections built into what was once thought of as a consistently structured reality, and that outliers simply fit into a larger, yet to be fully discovered, pattern. To me that possibility is more intriguing than the subtleties of a magician’s hand toss.

  32. 32
    BillE says:

    A couple of lines from the Forbes article.

    “Fourth, housing prices have fallen below fair value. Relative to rents, national average home prices are about 10% below fair value and have been the lowest relative to replacement cost in more than 30 years.”

    Let’s just say that’s true. What may be true as a national average means nothing for the Puget Sound region. It ain’t true here. As they say, every market is different.

    “Markets are efficient and participants in the housing market are well aware of its problems, so we believe these prices already reflect the “shadow inventory” of foreclosures and short sales in the pipeline. Buyers and sellers are not blind, they don’t have to wait to see homes pop up on the MLS to factor them into the price they are willing to bid or ask.”

    Laughable. I have much less faith in today’s buyers and sellers than the guys who wrote that.

  33. 33
    David Losh says:

    RE: Daniel @ 30

    Automated trading is by far the most powerful use of the computer.

    The idea you can take command of your financial destiny by trading on line, with your own research, is sheep to the slaughter. I’m sure there is a program that shows how many “investors” are in the wrong places at the wrong time.

  34. 34
    CCG says:

    “Markets are efficient”

    Yep, that tells you what you need to know about the Forbes article. Hell, what makes the real estate market such a great place to steal money (legally or otherwise) is that it’s the most INEFFICIENT market I can think of (unless maybe you’re into over the counter derivatives trading or something).

    I mean, good lord. Low liquidity. Huge transaction costs. No fungibility. Hordes and hordes of naive participants trading purely off of emotions. And on and on.

    Yeah, Forbes, that’s an efficient market.

  35. 35
    Astro Kermit says:

    Thanks for the post Tim, it was informative and entertaining =]

  36. 36
    One Eyed Man says:

    RE: BillE @ 32RE: CCG @ 34

    Nice summary of inefficiency in the real estate market. Suffice it to say that in my opinion the real estate market reflects the median understanding of its participants, which is sadly low. The market is often driven by psychology and emotion rather than economic fundamentals. But is there anything we can do as a society to protect us from the collective stupidity of the market? Is that something we can count on the entities like Forbes and the rest of the media to effectively take care of? Or will FinReg or some other regulatory solution like a new consumer protection agency be needed to make it better? The benefits of regulation can be outweighed by additional costs and other burdens, so making it simple and easy to administer is an important plus.

    I don’t think we need a new consumer protection regulator with independent authority. Nobody (including Forbes and NAR) forced people to buy houses and nobody force financial institutions to make bad loans (despite what the right says about the Community Reinvestment Act and the GSE’s). As to consumer protection, I’d settle for a bold print warning on the loan app and the purchase and sale agreement saying “Caution, buying real estate and/or taking out a mortgage may be hazardous to your financial health.” Then give them a HUD pamphlet including graphs of the Case Shiller Index that they’re required to read and sign. Beyond that, buyers should take responsibility for their own stupidity.

    Ironically, in addition to individual buyers, even many of the sophisticated institutions screwed up and failed to protect themselves. Rubin testified again today that the models of many of the large financial institutions, the rating agencies and the regulators failed to include the risk of decreasing real estate prices. How the fuck did that happen? Did they give the job to brilliant 20 something techies who are great with software but don’t know anything about real estate market history? Even if that’s what happened, didn’t they have some gray haired fuck review the model to make sure it didn’t leave important terms out? Is there a structural black swan in the conversion of risk models (and perhaps other formulary) to digital systems? Do the efficiencies gained through technology leave behind some of the collective wisdom because that wisdom resides with old people who are technologically retarded? If so, is FinReg going to fix it?

    Maybe FinReg should also require that financial risk models better match reality so that the banks don’t make so many stupid loans next time. Perhaps they should also require that a portion of the appraisal be based upon fundamentals like the gross rent multiplier or price to income ratios as opposed to just comparable sales. As you may know, commercial appraisals commonly rely upon rental revenue and capitalization rates to come to a value. If you say that that would kill the jumbo loan market because rents and income ratios don’t work to justify that market you’re probably right. But then again, maybe if you’re rich enough to afford a million dollar mortgage you should either pledge additional collateral for the loan, or save some of the big bucks you’ve been making for a realistic down payment.

  37. 37
    Daniel says:

    By One Eyed Man @ 36:

    Rubin testified again today that the models of many of the large financial institutions, the rating agencies and the regulators failed to include the risk of decreasing real estate prices. How the “lick” did that happen? Did they give the job to brilliant 20 something techies who are great with software but don’t know anything about real estate market history?

    As far as derivatives based on the real estate markets go a lot of the people figuring out the schemes were very well aware of the risk and the shortcomings of their models. The system did not reward such concerns, as large bonuses were to be made and people were actively discouraged from worrying about such things as this was taking up their valuable time.

  38. 38
    One Eyed Man says:

    RE: Daniel @ 37

    I heard a story from a WAMU insider that what you say is basically true about the dangers of WAMU’s loan portfolio. He was high up in their information technology division and left before the collapse when he was told by top executives not to worry about it. But it’s hard for me to believe that they could be so greedy and short sighted. I guess once again, I can’t necessarily forecast what other people might do based on what I think I would do. I’m not really that much of a risk taker. I was 38 years old when I bought my first house.

  39. 39
    David Losh says:

    RE: Daniel @ 37

    Most people thought we would have massive inflation.

  40. 40
    ARDELL says:

    My bottom call of $362,700 from 1st quarter 2009 is still holding…current median is a hair under $375,000. I think it will hold until 4th quarter of 2010.

    Heading out to L.A. today…will check out the market there for my daughters who are nearing home buying time in their lives…

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