The Year Everyone Was Wrong (Again) About Home Prices

The Wall Street Journal

22 January 2013

The great thing about predictions is that, after some time has passed, it’s possible to see which ones were right, and which ones weren’t.

For several years, economists and housing analysts have predicted a housing bottom, but few forecasts at the beginning of 2012 foresaw the magnitude of the rebound that the housing sector enjoyed last year. Quarterly surveys by real-estate website Zillow Inc. and Pulsenomics LLC poll around 100 economists and other housing analysts on their predictions about where home prices are headed.

So how’d they do last year?

Looking back at the survey from December 2011 shows that around 42 panelists, of the 94 that made their predictions public, saw prices declining on a year-over-year basis in 2012. The other 52 said prices would either rise or remain flat in 2012. Panelists base their home-price estimates on what they expect the Standard & Poor’s/Case-Shiller 20-city index to show.

Even the most bullish respondent in the late 2011 survey may have understated the actual 2012 home price gain, which won’t be tabulated and released by Standard & Poor’s until late February. Constance Hunter, the deputy chief investment officer of AXA Investment Managers, called for a 4.4% gain. In October, the Case-Shiller 20-city index stood 4.3% above last year’s level. (By March, Ms. Hunter revised down her forecast, calling for a gain of just 1.7% for 2012).

Four other respondents predicted annual gains of at least 3% for 2012: James Smith of Parsec Financial Management; Brian Wesbury and Robert Stein of First Trust Advisors; Bill Cheney of John Hancock Financial; and Andrea Heuson of the University of Miami.

The most bearish forecast came from John Brynjolfsson, chief investment officer of Armored Wolf, who predicted declines of 10% in 2012. Gary Shilling, the former chief economist at Merrill Lynch who now runs his own economic consulting firm, predicted an 8% drop. Barry Ritholtz, the chief executive of Fusion IQ and financial blogger, and Mark Hanson, a housing consultant based in Menlo Park, Calif., predicted declines of 5% and 7%, respectively.

So what are analysts predicting for 2013?

The vast majority of more than 100 housing economists and analysts predicted in this past December’s survey that home prices will increase this year, with a median forecast of a 3% gain in 2013. The median forecast also calls for prices to rise by 23% through 2017.

Of some 96 panelists that made their predictions public, only seven believe that home prices will decline this year, and only four believe that prices will decline by more than 1%.

The most optimistic 2013 forecast came from Joel Naroff, president of Naroff Economic Advisors. He predicts a 7.2% gain for 2013 and a forecast that will see prices 39% above current levels by 2017.

The most bearish of the group is still Mr. Shilling, who predicts that prices will fall by 6%, erasing all of the gains of 2012. Mr. Shilling is forecasting additional declines through 2016 and predicts that prices will be nearly 12% below current levels by 2017.

Messrs. Ritholtz and Hanson also forecasted declines of 2% and 4%, respectively, for 2013. Both forecasters also expect that 2012 home prices will end the year up by between 2% and 3% from one year ago, even though home prices through October were already up by nearly 7% from the beginning of the year.

Mr. Hanson says there’s no disputing that home prices improved during 2012, but he says his forecast didn’t take into account the aggressive intervention undertaken by the Federal Reserve’s bond-buying programs, which pushed mortgage rates to their lowest levels in more than 60 years. He also disputes the idea that the housing market has entered a sustainable recovery.

“When interest rates fall suddenly, it enables the 72% of buyers who get a mortgage to pay 15% more for the same house on flat income,” he said in an interview. “So in a perfect world, prices should be up 10% just because of the rate benefit.”

Now, he says, the housing market faces a “wall of headwinds” due to interest rates that can’t go much lower, rising taxes, and mortgage modifications that are re-defaulting. “We had a good year in 2012 and we’re going to have a worse year in 2013,” said Mr. Hanson.