Monday October 13, 2008

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Keeping Them Honest - Comparing 2007 Forecasts With Reality

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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 remained.

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.

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 million.

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.