A Quick Lesson on Forecasting the Future

Here's a quick lesson on how to do a better job of forecasting the future than many of the worthless highly-paid clowns strategists on Wall Street. It's the same formula I used when I wrote Financial Armageddon:

1. Look around
2. Gather and sift through readily available data
3. Sit back and think
4. Make your prediction

As a test example, I ask that you try and predict which way U.S. house prices are headed over the next year or so. To help you along, here are three recent news reports on the subject:

"US Housing ‘Double Dip’ Fears Grow" (Financial Times)

Steve Romeyn, a builder in the northern suburbs of Atlanta, Georgia, is feeling increasingly alone in his industry. “There are many, many builders who have gone out of business . . . a lot of them are working at Home Depot now,” says Mr Romeyn, managing partner at Windsong Properties in Woodstock, Georgia.

Fortunately for Mr Romeyn, his company has been somewhat insulated from the problems facing its rivals, as Windsong builds communities for adults over the age of 55, who tend to be more financially stable.

Windsong’s fortunes have also been helped by an $8,000 (€6,460, £5,400) tax credit for first-time homebuyers put in place last year and extended to the end of last April. Before the deadline, Mr Romeyn’s business benefited as retirees were able to sell their homes more easily, allowing them to move into his adult communities.

Now the tax credit has run out, that momentum has slowed dramatically. “In the last four weeks I’ve seen very weak traffic and weaker activity,” says Mr Romeyn. “It’s not encouraging and it means we’ll have to work even harder to convince people to move forward with their purchases.”

In May, new residential home construction in the US fell by 10 per cent to a seasonally adjusted rate of 593,000 units, its lowest level in five months, the commerce department said last week. Economists expected to see an impact from the ending of the tax credit, but not such a steep drop.

If the weakness continues, the likely conclusion will be that the tax credit brought forward demand from aspiring homeowners but failed to spur a more fundamental improvement in the housing market. The next big test will be new home sales data out on Tuesday. Economists fear the US housing market could be on the verge of a “double dip” – or even a “triple U”, given the fall in new construction over the winter.

"Whitney Says She Sees ‘Double Dip’ in Housing Market" (Bloomberg)

The U.S. housing market will experience a second recession, forcing banks to post additional loan-loss reserves, analyst Meredith Whitney said.

“Most investors are not baking in a double-dip in housing,” Whitney, founder of New York-based Meredith Whitney Advisory Group, said today in an interview on CNBC. “You’re going to see banks post additional reserves associated with this double-dip in housing, and that means weak performance going forward.”

U.S. home prices fell more than 30 percent from their peak in 2006 through the first quarter of 2009, prompting banks to take writedowns on mortgage loans. Housing starts have increased 24 percent since the low in April 2009 as mortgage rates remained near record lows and the U.S. government offered tax credits to homebuyers.

Whitney said she didn’t foresee the trend

"Housing Double Dip a Done Deal" (CNBC)

Everybody take a nice long look at [June 2nd's] Pending Home Sales Index from the National Association of Realtors, because it's just about the last positive picture we're going to see for a while. 

Yes, the index rose even more than expected, as buyers rushed in to take advantage of the home buyer tax credit.

And yes, those numbers will show up in Existing Home Sales in May and June, but then look out.

This index is based on contracts signed in August, and that's how the credit was set up; you had to sign your contract by April 30th and close by June 30th in order to get your $8000 if you're a first time buyer and $6500 if you're a move up buyer.

And then came May, traditionally the height of the spring housing season.

Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.

That means real organic buyers are exiting in droves.

"With another week of historically low mortgage rates, the trend from the prior three weeks continued, as refinance applications increased while purchase applications dropped. Purchase applications are now almost 40 percent below their level four weeks ago, while the refinance share, at 74 percent, is at its highest level since December," said Michael Fratantoni, MBA's Vice President of Research and Economics.

OK, so what's your forecast?

Comments

[Goldie]

Double Dip?

[roger]

Learning from your other blog.
The manufacturing and exporting Crown was proudly displayed
by The UK up to 1890 passed on to the US after that
and now the champion of manufacturing and export is>>>>
China. Lesson: who ever dominates the market of production
and exports accumulates the profits,others go into Bankruptcy.
Local Housing and or consumers have Nothing to do with it.Bottom lineThe UK/US and all the western world are in REGRESSION!

[The U.S. is next...]

"Europe’s Financial Class War Against Labor, Industry and Government" with Dr. Michael Hudson. Economic crisis in Europe created by predatory lending; European Central Bank stranglehold on the Eurozone; the Euro; foreign banks decimate Greece’s social structure; Marx’s industrial capital versus fictitious capital; Latvia as a model for the rest of Europe; Hudson’s financial and fiscal plan for Latvia; the Cold War and its ruinous effect on progressive economic thought. Guns & Butter.

http://www.philstockworld.com/2010/06/20/michael-hudson-europe%E2%80%99s-financial-class-war-against-labor-industry-and-government/

[DavosSherman]

Housing is fucked so is CRE.

In 2008 1.5 trillion in subprime blew up, the domino fell on the banks and those dominos fell on everything else.

2010 has 1.5 trillion in alt a's and option arms blowing to pieces, and 3.5 trillion - 5 trillion in CRE imploding. Don't have to be a rocket scientist or an economist to know how this train is going to go off this cliff and what it will impact with respect to an economy that is already totally fucked.

[Linda C]

The price of lumber crashed again maybe a month ago. That is always a good forecaster. CRE is what they don't talk about. Six months ago Timmy said it will be fine and not to worry about it. So why should anyone worry. Actually US manufacturing and exporting was up. But we do so little manufacturing now it isn't enough. Our economy is still based on "asset inflation". Until those "assets inflate" nothing is really going to happen. This is what happened in Europe during the Panic of 1873. Europe thought it was great to have "asset inflation", and huge debt while importing cheap good manufactured from the US. I don't "Europe's assets" ever really "inflated" again after that.

[Tim]

Copper has taken a dive too Linda.