Hope. But Not Change.

Hope, October 2005:

The keen interest of the media, and by extension, the public, in the future of house price growth in the United States centers on the question of whether there is a house price bubble nationally or regionally. Even among those who concede that a bubble per se may not be present, many worry that they may experience a decline in home prices in their metro area due to the very high and unsustainable rise in values over recent years in many parts of the United States. We examine this potential by forecasting the likely change in prices under three models – one that asserts a mean reversion correction on regional markets to return the national average gain in prices to the 50-year annual growth rate of 5 percent over the period 1998-2010; the second and third base future regional and national home price growth on economic fundamentals.

We also discuss recent findings by Chang, Cutts and Green (2005) and perform a simple extension of their work applied to 22 major cities. In all cases, we find the predicted worst-case outcomes to be much less dire than the “doomsday” predictions reported in the mainstream press and elsewhere.

Written by the then-Chief Economist, Frank Nothaft, and Deputy Chief Economist, Amy Crews Cutts, at Freddie Mac.

Last week, the current heads of Freddie Mac and Fannie Mae received news of 7-figure bonuses at the same time the government threw their corporations an unlimited lifeline.  In fact, the government won’t even estimate how much money it’ll take to stabilize these companies.  Talk about too big to fail.

If the company was making decisions based on those employees who were responsible for “primary and secondary mortgage market analysis and research, macroeconomic analysis and forecasting,” and who had, “published studies in academic journals and books on such topics as the economics of subprime lending,” then it’s easy to see where they went wrong.

It would be a good thing, then, if those economists had found other employment.  Unfortunately, they haven’t (see end of page 2).  That’s right.  Four years after their tsunami detector found nothing to worry about, nothing to see here, please move along, and one year into the administration that was going to hold everyone accountable, the same economists are still there, turning out reports and advice.

I’ve commented before on the metaphysical impossibility of making the sorts of predictions that these economists were trying to make.  But in this case, their catastrophic mistakes contributed mightily towards shaking the world financial system to its core.  They stopped issuing commentary along with their tables of projections from August 2007 until April of 2009.  Apparently they figured that if they couldn’t find something nice to say about the housing market, they’d better not say anything at all.  Now it’s all back to recovery and bottoms and shrinking inventory.

It seems that working for Freddie Mac – either in management or research – really does mean never having to say you’re sorry.

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