We used to regularly cover the monthly Economic and Housing Market
Outlook from Freddie Mac's Office of the Chief Economist, but sometime
last summer they stopped doing the usually interesting narrative that accompanied
the numbers so we no longer paid a lot of attention to the spreadsheet that
One problem with the spreadsheets was, because Freddie Mac was fine-tuning
it every month, it became more a mirror of what was happening rather than a
forecast of what we could expect.
However, with the New Year it is interesting to look back
to the forecast issued in January 2007 and compare it with the January 2008
outlook which came out late last month. In some cases the economists at Freddie
Mac had a pretty clear vision of what 2007 would be like, in others they were
caught up in events they probably never anticipated.
Here is a comparison of the forecast for 2007 with what really happened and
a look at what Freddie's brain trust expects for the next two years.
One place that the January 2007 outlook ran off the tracks
was its expectations about total home sales. While it predicted that sales would
continue a downward trend during the first two quarters of the year, the forecast
was for a gradual turn-around during the last half of the year with a total
of 6.35 million for the year and 2008 would be a year of recovery with sales
totaling 6.45 million.
Wrong! Total home sales eroded steadily through the year,
from an annualized rate of 6.49 million in the first quarter to 5.06 million
in the fourth. Total home sales for the year now appear to be in the vicinity
of 5.75 million (estimated) with sales in 2008 projected to fall in the first
quarter and then recover throughout the rest of the year to reach a total 5.11
Likewise, housing starts that were, in January 2007, predicted to begin to
recover in the second quarter to reach 1.62 million by year end and 1.70 in
2008 instead slid from 1.46 million (annualized) in the first quarter to 1.15
million in the fourth for a total of 1.34 million in 2007. Starts are now forecast
to be even worse this year; a total of 1.10 million.
In the brighter, sunnier days of 2007 Freddie Mac was looking for a 2.9 percent
appreciation in home prices for the year and 3.6 percent in 2008. Reality has
set in, and while there was appreciation for the year it was a scant 0.3 percent,
all of which came early in the year. By the third quarter appreciation had turned
negative and that trend is expected to continue through the end of 2009. Prices
will decline 4.0 percent this year and 3.0 percent next year.
The economists, however, did a pretty good job with their
crystal ball in other areas of the housing market. For example, they were almost
spot on with interest
rates, predicting an average 30-year fixed-rate of 6.3 for the year, precisely
what the average rate turned out to be, while the one-year adjustable rate mortgage
which was supposed to average 5.5 percent ended up only one basis point higher.
Predictions were accurate for total mortgage originations
as well - an anticipated $2,495,000,000 in January by years end was $2,498,000,000.
How those originations were allocated across mortgage type, however, was not
close to predictions. Adjustable rate mortgages were expected to have a 14 percent
market share in 2007, however the popularity of these products plummeted in
the fourth quarter and ended up at 11 percent with only an 8 percent share expected
next year. Refinancing came in about where expected. As a share of all originations
refinancing was predicted to account for 44 percent and was actually 47 percent.
Despite some of the real gaps between expectations and reality, 2007 was still
a year that saw some real convulsions in the credit markets. An honest person
has to look at the Freddie Mac predictions and conclude that perhaps there is
something to this economic forecasting stuff after all.