Statistics, More Statistics, and Damned Lies
“They’re lying.” This is what Yale economics icon Robert Shiller told Builder 100 Conference executives about experts who claim they know how the housing economy will behave in the months ahead. “It’s impossible to know.”
This would suggest that a positive outlook and a negative one are equally viable. So why not believe the more optimistic take?
Shiller is one of the smartest people today commenting on what makes the housing economy tick, and he’s the first to say he doesn’t know when it comes to predicting where it’s going to go. Mind his phrasing in an op-ed piece from the New York Times this past Saturday. He carefully uses the word “may” to say, “hey, it could go the other way, too.”
Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.
We’re ever concerned about predictions. We heard a lot of anecdotal good numbers for April, and have gotten word from a number of builders that May was just as good or even better. We heard of one home builder in the D.C. metro market who closed on 55 homes in May, a good 20% ahead of plan. In Phoenix, monthly sales in some communities are better than they’ve been dating back almost two years.
At the same time, the gathering financial storms of nonperforming commercial mortgage back securities and unrepayable credit card debt coupled with an expanding black hole of unemployment remain abstractions whose risks to forward planning may be too hard to calculate.
Have investors who’ve restored more than 40% of value to stocks from their low-point and gotten the Dow Jones in positive territory for the year factored in these forces already? Have government and Fed policies actually begun to find traction in the financial system that have started to slow the bleeding?
Here’s what we think. For most privately held home builders, especially the ones on life support who are one letter from the bank short of doom, there’s no gain whatsoever from a negative scenario. These companies are beyond scenarios altogether, and just pumping to get another sale done to keep working their way through their bank obligations for another month.
Housing prices–especially national ones–bear little relationship to the realities of these companies. They’re focused on the small ball. Build quick. Beat existing, distressed, and foreclosed properties to the punch somehow, and make it so that the monthly payments make sense to a home buyer exactly the way these companies’ own monthly payments to their lenders stay on course.
More macro financial shocks are coming. More job loss will put a drag on local economies. More household deleveraging will take money out of circulation as consumers curb their spending.
Even so, Shiller says, what happens time and time again in the history of economics is that people’s behavior frequently defies logical supply and demand behavior.
All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.
Can the 87% or more of people who may stay employed offset the negative feedback of those who’ll continue to swell the ranks of those involuntarily out of work during the next 12 months as the economy grapples for recovery?
Will those who are able to hang onto their jobs be confident enough in their income stability to strike while the pricing, interest rate, and Federal tax credit incentive irons are hot?
The expression one real estate/housing player uses to offer an answer to these questions is this: “You’ve got to fake it to make it.” There’s no upside to believing the downside outlook.
For the moment, getting to ”the other side” of this mess means staying in business through tomorrow.
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I’m going to be reviewing Shiller’s book “Animal Spirits” for Inman News later this month (I have to read it first!). I’m also hoping to nab an interview with him for my Housing Chronicles radio show on BlogTalkRadio.com. Should be interesting!