Dangerous Times: Where are the Experts?

A very telling excerpt from The Center for Economic and Policy Research that expresses my thoughts on the subject wholeheartedely.

Predicting fluctuations in financial markets will always be difficult, primarily because of the importance of psychological factors, but it is in principle possible to assess market prices relative to fundamental factors: corporate profits in the case of the stock market and the rental value of housing in the case of the housing market. Unfortunately, this is not the analysis generally performed by the experts who get cited in the media. In times of irrational exuberance, these experts are often among the most exuberant.

This can be seen with a quick examination of the Livingston Survey, a survey of 31 prominent economic forecasters conducted twice annually by the Federal Reserve Bank of Philadelphia, as summarized in Table 1. The December 2000 survey shows that the economists sampled expected the economy to grow at a healthy pace through the next two years, completely missing the recession that is dated as having begun just three months later.

TABLE 1

Economic Forecasts, December 2000

2001				2002
Projection		Actual		Projection		Actual
Unemployment	4.3%		4.8%		4.5%		5.8%
GDP growth	3.1%		0.8%		3.4%		1.9%
S&P500 (year-end)	1490		1145.0		1639.5		899.0

The median forecast from the 31 economists surveyed was that the economy would grow 3.1 percent in 2001 and 3.4 percent in 2002. Actual growth for the two years was 0.8 percent and 1.9 percent, respectively. The forecasters expected that unemployment would remain low, projecting an Center for Economic and Policy Research, August 2007 􀁺 5

average rate of 4.3 percent in 2001 and 4.5 percent in 2002. The average unemployment rates for the two years ended up being 4.8 percent and 5.8 percent.

Perhaps even more striking than their failure to foresee the recession is the fact that the economists surveyed not only expected the stock market bubble to persist, they actually expected it to get even larger. The average forecast for the S&P 500 index for the end of 2002 was 1640, nearly 100 points above the peak reached in March of 2000. Certainly this group of economists did not recognize the stock market as being driven up by an irrational bubble. This is especially striking since the bubble had already begun to deflate by this point. The Nasdaq had fallen by almost 40 percent from its peak in March and even the broad S&P 500 index, which consists of large established companies, was down by more than 10 percent.

In short, when it came to the stock market bubble, the experts provided few words of warning for ordinary investors trying to figure out what to do with their 401(k)s. Those who listened to the experts would have seen the market value of their stock portfolios shrink by close to 50 percent from the peaks of 2000 to the troughs reached in the summer of 2002. While the market has since rebounded from the 2002 lows, it is still flirting with levels approaching the 2000 peaks. Since inflation has been approximately 2.6 percent annually over the last seven years, the real value of the S&P 500 is still more than 20 percent below its 2000 level. This means that families who held stock from the peak of the bubble have still seen negative real returns since 2000, even after adding in the dividends received over this period.

Those looking for advice on the wisdom of homeownership were no better served by the experts most often cited in the media. When it came to assessing the state of the housing market the media would often turn to organizations that had a direct stake in promoting home buying: the National Association of Realtors (NAR), Mortgage Bankers Association (MBA), and the National Association of Homebuilders (NAHB). All three organizations have a clear interest in promoting a positive view of the housing market, regardless of the actual situation. Yet, spokespeople from the three organizations dominated coverage of the housing market. TABLE 2

Media Citations on Housing Market, 2005-2006

New York Times						Washington Post
Bulls	2005	2006	Total	2005	2006		2005	2006
David Lereah, National Association of Realtors	796	1000	1796	9	7		14	12
Doug Duncan, Mortgage Bankers Association	217	180	397	8	1		2	5
David Seiders, National Association of Homebuilders	224	428	652	2	4		12	6
Total	1237	1608	2845	19	12		28	23
Bears
Robert Schiller, Yale University	276	240	516	4	3		0	1
Edward Leamer, UCLA	44	44	88	0	4		0	1
Dean Baker, Center for Economic and Policy Research	133	115	248	7	8		9	8
Total	453	399	852	11	15		9	10

Table 2 shows the number of times that the chief economist from each of the three organizations was cited in major media outlets in 2005 and 2006, along with the number of citation for three leading housing “bears” over the same period. The number of citations in the New York Times and Washington Post are also broken out separately.

As can be seen, David Lereah, chief economist of the National Association of Realtors, and the author of Why The Real Estate Boom Will Not Bust and How you Can Profit From It is by far the most frequently cited expert on housing. In fact, in both 2005 and 2006 he was cited more frequently than all three housing bears combined. This is true for both media coverage in general and the housing coverage in the Washington Post. It is worth noting that the New York Times was far more balanced in its presentation of views from bulls and bears.

In short, when prices of stock and housing reached levels that were clearly unsustainable, the public could hear few words of warning from the media. The experts that the media relied upon were overwhelmingly proponents of the irrational exuberance that had overtaken these markets.

In many cases, the experts worked for organizations that had a direct material interest in sustaining the bubbles. Voices of caution were rarely presented. When it came to some of the most fundamental financial decisions that families face, investing retirement funds and buying a home, the media were badly misinforming the public.

Comments

[Reggie]

From the Motley Fool:
http://www.fool.com/investing/general/2007/09/11/hiding-the-ugly-truth-about-housing.aspx

"New home sales predicted to drop by 24%. Existing by 9%. Will probably be worse."

Why do I say worse? Because the NAR's home-sales predictions have been as useful as ice skates in Iraq, and they don't tend to err on the conservative side. They're so wrong, so often, that I started tracking them in a spreadsheet, just to document the pain. (The last column documents the NAR's shameless headline spin.)

Existing Home Sales Estimates
Sales Estimate
Variation from 2006
NAR Spin

January
6.42
(0.93%)
"Gradual Rise Projected for Home Sales"

February
6.44
(0.62%)
"Existing-Home Sales To Improve, With Later Recovery For New Homes"

March
6.42
(0.93%)
"Housing Recovery Likely This Year, but Timing Isn't Clear"

April
6.34
(2.16%)
"Tighter Lending Standards Good For Housing but Will Dampen Sales"

May
6.29
(2.93%)
"Housing Forecast Changed Slightly Due to Impact From Tighter Lending "

June
6.18
(4.63%)
"Home Sales Projected to Fluctuate Narrowly With a Gradual Upturn"

July
6.11
(5.71%)
"Home Prices Expected to Recover in 2008 As Inventories Decline"

August
6.04
(6.79%)
"Near-Term Home Sales to Hold in Modest Range"

September
5.92
(8.64%)
"Mortgage Problems to Dampen Home Sales in The Short Term"

And while the NAR's craftily hidden doom and gloom bodes ill for millions of American home flippers stuck in bad mortgages, it looks just as ugly for homebuilders like Pulte Homes (NYSE: PHM), Hovnanian Enterprises (NYSE: HOV), Beazer Homes (NYSE: BZH), Ryland Group (NYSE: RYL), Toll Brothers (NYSE: TOL), Centex (NYSE: CTX), and all the rest. Here's how the NAR's ever-dwindling predictions for new-home sales stack up with last year's total of 1.05 million homes.

And while the NAR's craftily hidden doom and gloom bodes ill for millions of American home flippers stuck in bad mortgages, it looks just as ugly for homebuilders like Pulte Homes (NYSE: PHM), Hovnanian Enterprises (NYSE: HOV), Beazer Homes (NYSE: BZH), Ryland Group (NYSE: RYL), Toll Brothers (NYSE: TOL), Centex (NYSE: CTX), and all the rest. Here's how the NAR's ever-dwindling predictions for new-home sales stack up with last year's total of 1.05 million homes.

New Home Sales Estimates
2007 Estimate
Variation from 2006

January
957,000
(8.86%)

February
961,000
(8.48%)

March
950,000
(9.52%)

April
904,000
(13.90%)

May
864,000
(17.71%)

June
860,000
(18.10%)

July
865,000
(17.62%)

August
852,000
(18.86%)

September
801,000
(23.71%)

The rosy-lensed NAR predicts even sadder new home sales for 2008, at 741,000 units, or a 29% drop from 2006.

If the ever-optimistic NAR is predicting that kind of slowdown, I think it's going to be worse. We can only hope that it will be a much longer time before people are fooled into believing that housing is an "investment."