Why You Should Ignore Economists

By Jeff Harding        

I get market reports from the National Association of Home Builders (NAHB). Before the crash their economists believed the housing boom would last forever. During the crash they acted as if it were a temporary anomaly. Recently they’ve been saying that recovery of the housing market is right around the corner.

The title of the lead article in NAHB’s latest Nation’s Building News is “Housing, Economic Growth Heading Toward Higher Ground.” Their current Chief Economist, David Crowe, said:

Moving forward, the housing market should derive strength from pent-up demand and demographics, which hold the potential for strong household growth. Annual household formations are forecasted to average 1.532 million for the period of 2009 to 2013, compared to an average of 1.247 during 2004 to 2008. Providing “an extra push” will be the echo boom generation, the children of the post-World War II baby boom, the oldest of which are now in their late 20s, he said.

Following a 6.3% decline in real growth in the gross domestic product in the fourth quarter of 2008, the worst since the early 1980s, deterioration in this year’s first quarter should be almost as bad, Crowe said, with a drop in GDP of about 5.2%. The current quarter should show that “some of the worst is past,” he said, with a decline in growth of perhaps something just above 1%, demonstrating that consumers are slowly coming back to life and paving the way for a return to positive territory in the following quarters.

Crowe is the replacement for Dave Seiders who was fired for giving overly rosy predictions. The National Association of Realtors fired David Lareah for the same thing. Lareah admitted later that he was more or less doing his job by putting a positive spin on reports.

I have no idea where Crowe gets his data. Maybe he sees the same “green shoots” that the Obama Administration sees. As one of my law professors said there is a fancy Latin phrase for everything, which in this case is cum grano salis, or take this with a grain of salt.

 Since I have followed the housing industry carefully for the last 5 years, I have collected a lot of data and predictions of economists. All of them were wrong about the future of the economy; some more spectacularly than others. Let me share some of them with you. All of these quotes were taken from the Wall Street Journal unless otherwise stated. I am not cherry-picking the data. These forecasts were generally in line with most economists at the time.

March 2004; Prudential Realty Investors

Realistic assumptions about these forces indicate that the national housing market is structurally sound and should, once again, weather the impending rate increases without catastrophe. Over the next five years, the housing market will likely experience modest annual appreciation in the range of 2.5% to 3%. On a metropolitan basis, the areas that have seen high price growth recently seems to be at the greatest risk, while markets that have tracked closer to the national average are more likely to witness only modest impacts from a rise in interest rates.

August 17, 2005

When America’s housing boom finally ends, don’t expect a loud pop.

“It’s not going to be a big dramatic event,” says William Apgar, senior scholar at Harvard University’s Joint Center for Housing Studies.

The end of the boom isn’t likely to cause a recession, however, says [Richard J. DeKaser, chief economist at National City Corp., a Cleveland-based banking concern]. He expects prices to erode in some overheated markets. But because the housing market depends so much on local conditions, prices probably will continue to rise in some places as they fall in others, diluting the effect on the national economy, he says.

November 15, 2005

Ben Bernanke, chairman of President Bush’s Council of Economic Advisers and nominee to succeed Fed Chairman Alan Greenspan in February, said last month that a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near” its long-term trend next year.

Mr. Lereah of the National Association of Realtors still expects the housing market to have a soft landing. He predicts that median home prices will rise about 5% in 2006 after leaping 12% this year. In September, the national median stood at $212,000, according to the Realtors.

Feb 7, 2006

“Selling homes this first quarter was certainly more difficult than one year ago,” said Robert I. Toll, chairman and chief executive [of Toll Brothers,] in a prepared statement. “We experienced softening demand, to varying degrees, in a number of markets and continue to be constrained by long delivery times at many of our communities. He added that, although demand had eased, “most of our markets remain fundamentally healthy, based on job and income growth data.”

February 15, 2006

David Lereah, chief economist for NAR, said the modest dip in appreciation indicates a market adjustment. “Although home sales have eased, the tremendous momentum in price appreciation was sustained in the fourth quarter because tight inventories still favored sellers,” he said.

 April 28, 2006

NAHB Chief Economist Dave Seiders predicted the rate of home-price appreciation would slow to 4% by the end of 2006, only a third of last year’s pace. In the first quarter of 2007, he expects new and existing single-family home sales to fall 5.8% to a total of 6.59 million units and single-family starts to drop 13.4% to 1.15 million units. “It will be a general cooling process, not a thud,” he says.

April 26, 2006

For the nation as a whole, many real-estate executives and economists continue to predict a fairly soft landing for the housing market. Among those taking this view are Ronald J. Peltier, chief executive of HomeServices of America, a chain of real-estate brokerage firms owned by Warren Buffett’s Berkshire Hathaway Inc. But Mr. Peltier warns that prices in parts of Southern California could fall as much as 5% to 10% this year. The picture is mixed in Phoenix, Las Vegas, San Diego and Washington, D.C. Inventories have surged in all four cities, particularly in Phoenix, as sales have slowed. But job growth is well above the national norm, and that should soften the landing.

The Las Vegas market has “normalized,” says Linda Rheinberger, president of the Greater Las Vegas Association of Realtors. Prices there are likely to rise 5% to 10% this year after jumping about 49% in 2004 and 14% in 2005, she says.

March 26, 2007

Sales of single-family homes decreased by 3.9% to a seasonally adjusted annual rate of 848,000, the Commerce Department said Monday. Wall Street expected a 6.7% increase in demand. The drop followed a 15.8% plunge in January and carried the annual sales rate to its lowest level since 793,000 in June 2000. The median home price dipped year over year and inventories grew.

“This is just horrific,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. The housing sector went into decline and hurt overall economic growth after a long boom. There have been signs the market reached a bottom and was struggling to recover. But Monday’s data posed the question whether the sector had more distance to drop.

The weather uncertainty, coupled with the inherent unreliability of these numbers, makes us very reluctant to run with the headlines and argue that this is the start of the second leg down in home sales; we have to wait for the March and April numbers,” he wrote in a research note.

I have a lot more of these, but you get the picture. So when the NAHB’s Mr. Crowe talks about “pent-up demand and demographics” I ignore it for the wishful thinking that it is. When has there not been a time that economists couldn’t see pent-up housing demand or good long-term demographics?

Economists like these operate on historical data. The idea is that by looking at the past you can predict the future. They failed to look at what was happening right in front of their eyes. They failed to see that massive money pumping by the Fed created a classic boom in housing that went bust when money supply declined.

For almost 4 years Fed Funds were in the 1% range (from January, 2001 to November, 2004 when it started going up above the 1% range. The result was a dramatic expansion of the money supply (Money Base and M1). And then money supply contracted with the rise in the Fed Funds target rates (by March, 2007 it was 5.25%).  Boom and bust.

Click to Enlarge


What most economists missed was the rise in money supply or the government’s role in creating the boom. They either weren’t measuring money supply correctly or they didn’t see it as a significant factor in housing and mortgage rates. This is probably a philosophical error. That is, they thought that the money supply increase was a good thing rather than something that massively distorted economic decisions resulting in a severe collapse and recession/depression.

Ignore what economists say. They are guessing and their guesses are all over the board. 


4 comments to Why You Should Ignore Economists

  • Lloyd G.

    I know you’re trying to be kind, but most of the economists you quote are not “guessing.” They’re cheerleading. There’s a difference. If they’d been guessing they would’ve been right more often. These people are part of industry PR. “Don’t trust our sales people? We got economists with charts and statistics and stuff.”

  • Jeff Harding

    Lloyd, you are right about that. That’s why Seiders and Lereah were fired. But they just hired replacements that are doing the same thing. Ditto, Kudlow and Brian Wesbury.

  • Mark Baird

    The failure of the markets were men’s egos, the arrogance of power. We have the one great failure of both liberals, conservatives and libertarians, failing to see past their egos to realize that markets do fail. Failing to understand that markets are short term instruments, a tool used by society to get what they want and need. Until people quit pursuing these utopian beliefs we will always have these great swings in our lives. We will move from one utopian madness, the free markets and consumerism, to the other utopian madness of socialism and big government.

    Free markets are a SHORT TERM TOOL for allocating scarce resources. Free markets DO NOT provide EVERYTHING people NEED or WANT. BIG GOVERNMENT CAN NOT solve all of OUR PROBLEMS. (This is the problem of left/right politics in this country.)

    Don’t let your ego get the best of you or you will fall into the same trap as those economist/chearleaders/salesman.

    • Mark:

      I appreciate that you took the time to comment on this article. But it has nothing to do with man’s ego. Assume that people are always have big egos and are greedy, which is what you are getting at. Since greed always is a factor in economic analysis, then, these cycles don’t just start from nothing; it has to be something other than greed-ego. All cycles start from a credit expansion by the central bank. Generally people behave the same way when they face inflation which is to get out of cash and into appreciating assets. While I don’t endorse their theory, the research done by Rogoff and Reinhardt, “This Time is Different: Eight Centuries of Financial Crises” points out that this is true through time. I do believe free markets are the best way to organize society. I am going to guess that you have not studied economics, forgive me if I am wrong, because of the nature of your comment. If you wish to start to understand economics, I suggest you do some reading and then we can talk. I suggest Henry Hazlitt’s Economics in One Lesson, one of the best books ever written on economics, and a 50 year best seller. It’s short and remarkably insightful.