By Jeff Harding.
This map has just been released by Moody’s Economy.com. It shows their prediction of when the housing market will return to pre-crash heights. Moody’s has been less than reliable in the past, at least insofar as their faulty credit ratings of derivatives (i.e., subprime securities). Some people have taken to call them “Muddy’s” for their lack of incite. So, take this with a healthy dose of skepticism.
Hi, Jeff – Do you know that although Economy.com carries Moody’s logo, it is really a separate buisiness unit that provides research opinions only, independent from Moody’s rating business. The analysts and economists at Moody’s ratings group do not interact with those at Economy.com, and Economy.com’s opinions are not necessarily reflected in Moody’s credit ratings, either.
In fact, Economy.com’s chief economist, Mark Zandi, was one of the most pessimistic economists about the US housing market. I recall that he was loudly arguing the Doom’s Day was near, when Greenspan was shamelessly telling mortgage bankers not to worry.
I actually attended an impressive presentation by Mr. Zandi himself in 2005 / 2006. To be honest, I was a bit shocked to see him paint an extremely negative picture of the US housing market, as his company’s another unit (structured ratings group) was growing like crazy by riding the waves of subprime hype and the CDO boom.
Moody’s tragedy was that its management placed so much emphasis on their “business interests” rather than quality rating services. While the most reliable opinions were within a reach, Moody’s structured rating unit was too busy in making $$$, ignoring the valuable warnings from its own sister.
So, to me, it does not sound fair to bash Economy.com, simply because they share the Moody’s logo with their (unrelated) sibling whose ratings have proven so rousy.
Priscilla, you might be right about my tarring Mark Zandi with a broad brush. I am very familiar with Mr. Zandi and follow his commentary whenever I can, especially on housing issues. However, I don’t recall him getting anything “right” about the crash or the ensuing storm. His name is not mentioned among those economists or writers who got it “right.” I think he’s a decent economist, but like his brethren, he appears to be an econometrician type who believes in Keynesian theory, or at least the more conservative side of it known as Monetarism. But if I am wrong, please forgive me.
Priscilla, I checked some of my old research files and found this:
9/05:
The housing boom has been an enormous boost to the economy, spurring construction, increasing the net worth of millions of families and allowing Americans to borrow against the rising value of their homes. Mark Zandi, chief economist at Economy.com, a forecasting firm in West Chester, Pa., says the housing surge accounts for nearly 40% of the four million jobs created by the U.S. economy over the past two years.
Economists disagree about how much damage a housing downturn would inflict on the economy. Mr. Zandi hopes that strong job growth in other parts of the economy will cushion any blow from housing. But, he says, the risks of harm to the economy will grow if house prices keep surging for another year or two.
6/05:
Mr. Zandi of Economy.com adds that local housing collapses in New England and Southern California in the late 1980s and early 1990s “infected the broader banking system.” Banks today are better capitalized, and thanks to consolidation, less exposed to any single region, he says. Moreover, banks have “securitized” many of their mortgages — that is, repackaged them as standalone securities and sold them to investors and to federally chartered companies Fannie Mae and Freddie Mac.
But for the same reason, he warns, “No one really has a grip on who has the risk.” If something goes wrong in the mortgage market, a lack of transparency could cause investors to shun good and bad borrowers alike, he says.
4/06:
Mark Zandi, chief economist of Moody’s Economy.com, pointed out that home prices have soared so high in many parts of the country that they’re out of reach for many buyers. “Affordability has collapsed to where it was in the `90s, despite very aggressive lending,” he says. The rapid rise in interest rates over the past few months have become a barrier for many first-time buyers, he says, and are prompting many short-term home flippers to sell their holdings. That could lead to localized crashes, which he defines as a peak-to-trough price decline greater than 10%, in markets like Washington, D.C., the Jersey Shore, Miami, Las Vegas and Orlando, Fla.
I will admit he was more “right” than many and he general feel for the market was correct, although he didn’t see how it would eventually severely impact the entire economy. So perhaps I am too harsh on him.