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Posts Tagged ‘Robert Shiller’

[Non Non-Heinous] Past Performance is No Guarantee of Future Results

February 9, 2009 | 10:27 pm | |

Daniel Gross has an insightful post at Slate called Declining Declinism: Don’t believe the historians and economists who say America’s best days are behind us.

Aside from Declining Declinism, I would also could consider Recessionary Recess and Falling Fallout. My kids remind me often of the double-negative wonder of “That’s totally non non-heinous” used effectively in Bill & Ted’s Excellent Adventure.

Bill and Ted take this to the extreme and use it to their advantage to really emphasize words. If something is heinous it is bad. If it’s non-heinous that’s one negative and it becomes good. It’s it’s non-non-heinous then the negatives cancel each other out but the emphasis of the word heinous becomes double, so it becomes really bad.

Here’s the gist from Dan:

Economic prognostication is hamstrung by a tendency to extrapolate from recent trends far into the future. It happens at the top of a cycle—the Dow is going to 36,000! Housing prices will never fall!—and it happens when we plunge into a ditch.

Of course that was part of the problem with the way the bad news was delivered by Robert Shiller and Nouriel Roubini a few years ago. For some reason the former hasn’t retained his momentum and the latter is now loved by the media. Perhaps its more about the way they party.

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[The New, New Boom] Doom & Gloom

February 2, 2009 | 1:28 am | |

I am a bit taken aback by the army of real estate marketing gurus and top line real estate agents that are openly talking about the weak housing market as part of their public image.

It does seem to give the real estate brokerage industry more credibility but I have a hard time processing this new market acceptance, perhaps because the hard sell was on prime time for so long. Heck, even Lawrence Yun of NAR has injected less rosy projections into the converation than his predecessor David Lereah would have ever dreamed of.

In fact Doom & Gloom has proved very lucrative for some as of late (they’re all in Davos): Nouriel Roubini (Dr. Doom), Robert Shiller (Irrational Exuberance), Nassim Taleb and others. And I say good for them!

Ben McGrath writes an excellent article and provides a fascinating perspective in the companion podcast about predictions of economic and social collapse.

It’s been completely fascinating to witness the seemingly overnight global change in the financial investment perspective. I am not clear on whether this is a long term change or simply an immediate reaction to everyone’s smaller paycheck.

Yes, Elvis has left the building (in Illinois), but the Boss was at the 50 yard line.

UPDATE: Optimism is the cure for the downturn.

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[Banking On Recovery] Did The Glass-Steagall Repeal Cause Our Insecuritization?

September 29, 2008 | 12:15 am | |

There has been a lot of debate on whether the repeal of Glass-Steagall on November 13, 1999 via the Gramm-Leach-Bliley Financial Services Modernization Act was the beginning of the end of the separation of financial church and state. The Glass-Steagall Act, also known as the Banking Act of 1933 was created to prevent commercial banks from entering the investment bank business.

If you’ve been abducted by aliens for the past three weeks, here’s a great way to catch up on the bailout.

And when you are caught up (assuming the alien thing was accurate), here’s a once in a while requirement from Matrix. A required reading assignment: What’s Free About Free Enterprise?

The first is the risk of moral hazard within the bailout itself. That is, if government is going to make good so many losses throughout the system, why would anyone set limits on future risk-taking? The situation could turn into a free-for-all that makes the recent disregard of risk look like child’s play.

The second problem is more philosophical, involving what the bailout plan reveals about the functioning of the free enterprise system. This raises disturbing questions. Although I agree with President Bush’s observation that “the risk of not acting would be far higher,” we should be aware of the secondary effects of what we are getting into.

Analysis of an IMF study on bank failures shows that the average recovery rate in a banking crisis averaged just 18 percent of the gross costs. Barrons seems to think the taxpayer will come out ahead.

Not everyone thinks the bailout is a great idea.

I should add, though, that I don’t think the people spearheading the bailout have a clear idea about what they’re doing either. They remind me of the old saying: “Something must be done. This is something. Therefore this must be done.” I’m a former student of Chairman Ben Bernanke and his behavior during this mess has been a big disappointment.

Robert Shiller writes an opinion piece in the Washington Post this weekend telling everyone to calm down – government intervention is not unusual and not a bad thing. Everybody Calm Down. A Government Hand In the Economy Is as Old as the Republic. He makes the argument that capitalism evolves and is not etched in stone. He makes a compelling argument.

Megan McArdle in The Atlantic says its not about the Glass-Steagall repeal at all because securitization has been around for a while and Gramm Leach didn’t impact lending standards at commercial banks, among other items.

But Dan Gross at Slate and Newsweek says that the repeal is the end of an era and perhaps infers, that it caused the situation we are in today.

The policy response was to erect a wall between investment banking and commercial banking. It outlasted the Berlin Wall by a few decades. In the 1990s, as another bull market took hold, momentum built to overturn Glass-Steagall. Commercial banks were eager to get into high-margin businesses like underwriting hot tech stocks. Brokerage firms saw commercial banks, with their massive customer bases, as great distribution channels for stocks, mutual funds, and other financial products that they created. Generally speaking, the investment banks were the aggressors.

While I don’t blame the credit carnage all on the repeal of Glass-Steagall, it sure is a compelling milestone and played a role. Banks and investment banks had blurred lines of distinction and regulators were no match for the investment banks. Of course, JPMorgan Chase, who seems to be coming up roses with recent mopup efforts, was the merger of an investment bank and a commercial bank.

The mindset was free markets need to be free because market forces were self-regulating. Of course, that purist view may very well have caused one of the most constraining regulatory environments in the modern era going forward.

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[Rank Forecasts] Rankled By Rankings, Prognostication At Its Finest

March 24, 2008 | 12:41 pm | |

I linked to a story about forecasters a few days ago but it’s still got me confused.

These days, housing prognostication is big business (I do a little prognosticatin’ myself). There are a few people that I watch closely and in fact, several that I fawn (is that a word?) over. But I was taken aback by the USAToday/Atlanta Fed’s rankings of the most accurate forecasters out of a pool of often quoted economists.

It was done anonomously so the analysts would not be swayed by personalities they were covering:

Atlanta Fed economist Tao Zha and Fed programmer Eric Wang analyzed the quarterly predictions to determine the most accurate forecasters. Zha and economists Robert Eisenbeis and Dan Waggoner had previously developed the methodology. Rather than assessing the accuracy of each forecast variable separately, as is commonly done, the economists used statistical methods to assess the joint accuracy of the predictions. The Atlanta Fed economists did not know the identities of those they were evaluating.

David Berson, formerly of Fannie Mae and now of PMI, has long been one of my favorites, as well as Mark Zandi of Nariman Behravesh of Global Insight and Ethan Harris of Lehman are on the list and I enjoy reading their work. The remainder on the list I am not familiar with.

However, several prominent economists were not ranked, and I am not sure what that implies:

David Rosenberg of Merrill Lynch, a bear, pumps out a lot of interesting work and I enjoy hearing him speak often on Bloomberg.

Robert Shiller, perhaps the most widely quoted economist out there, was not on the list. He is the author of a best selling book and co-creator of the Case Shiller Index.

Nouriel Roubini, an often quoted economist for bloggers and the media, is perhaps the most negative forecaster out there, yet he is a terrific public speaker (just make sure you are euphoric before you hear him speak).

What caught my attention was the inclusion of Lawrence Yun of NAR as the 5th most accurate forecaster. I found that shocking, actually. I am sure he is a nice person and works very hard, but he has made some of the most amazing comments about the state of the housing market each month that have nothing to do with the data that is released. Perhaps that’s the problem. It’s not the data (that was analyzed) it’s the delivery of the message.

Here’s an example.

Today, NAR’s Existing Home Sales stats were released:

Sales of existing homes increased in February and remain within a fairly stable range, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.9 percent to a seasonally adjusted annual rate (1) of 5.03 million units in February from a pace of 4.89 million in January, but remain 23.8 percent below the 6.60 million-unit level in February 2007. The sales pace has been in a fairly narrow range since last September.

Here are NAR’s hard numbers.

Lawrence Yun, NAR chief economist, said the gain is encouraging. “We’re not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing,” he said.

How can you issue a press releasing relying on the change between January to February to be a sign that the market is improving?

Sales are generally slowest in January. The change in sales from the prior February was down 23.8% and prices over the same period are down 8.2% yet the headline says the market is stabilizing?

Please tell me what the basis is for that headline in the facts that were presented or any external changes in the mortgage/credit markets and the economy? Am I missing something here?

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[Reuters Housing Summit] Concentrated Real Estate Snippets

February 21, 2008 | 10:34 pm | Public |

I was invited to participate in the Reuters Housing Summit this week (which happened to be during my vacation and how cool is it to talk about housing when you are taking time off from work?) It was quite an interesting experience – I thoroughly enjoyed it. Each participant gets grilled for an hour by Reuters senior editors and reporters. I felt I needed another twenty four hours to address all the housing issues of the day, but alas, it was my vacation. The interviews were recorded and snippets were released as audio files.

Check out:the summit blog for more interviews and the housing section of the Reuters site.

And to continue with the shakey market theme (supposedly) our satellite was intentionally shot down and an earthquake struck northwestern Nevada.

In other words, a good week for a vacation.

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Repeat Sales, Fancy Math and Shaking The Tree

September 20, 2007 | 12:26 pm | | Public |

There was a great Page One article in the New York Sun by Bradley Hope today Amid Market Uncertainty, a New Hedge that covers Radar Logic’s property derivative product RPX. (note: I head up Radar Logic Research). As a good reporter should, Bradley gathered a quote from Karl Case, one of the creators of another property index, the S&P/Case-Shiller® Home Price Indices that has been available for more than a year.

While I have met the widely quoted Yale economist Robert Shiller and recently appeared with him at Lincoln Center at the Real Deal New Development Forum, I have not had the pleasure of meeting his longtime associate, Karl Case.

Mr. Case, who has been involved with research into real estate indices, said the RPX caters more toward dealers, but includes more “unpredictable random error” by using complex mathematics to calculate the values on a daily basis.

“They add fancy math, but they don’t add data,” he said.

Coming from a respected economist, I am surprised by his lack of understanding of RPX, and for making this type of comment, especially when RPX methodology is transparent and fully available on the Radar Logic web site.

Professor Case has really got it backwards. RPX has added data which is specifically excluded from the S&P/Case-Shiller® Home Price Indices:

  • Condos – “Condominiums and co-ops are specifically excluded” (from CSI)
  • New construction – “new construction is excluded” (from CSI)

It is fair to say that the real estate markets in the metro areas covered in their index have been significantly influenced by condo and new construction activity.

In addition:

  • Foreclosures – “subsequent sales by mortgage lenders of foreclosed properties are candidates to be included in repeat sale pairs” (from CSI) How is this determined?

As far as the fancy math comment goes, all I can say is: “good grief.” The RPX proprietary methodology was created by an affiliate of Radar Logic, Ventana Systems who for more than 20 years have been creating and deploying robust, comprehensive models of a complex environment for strategic visibility and control and whose current projects include modeling the national airspace system, research and development productivity, national economy, energy, climate, disease epidemiology and intervention. Ventana is run by the brightest people I have ever met.

Stay tuned!

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A New York Story: Pop Goes The Country

September 18, 2007 | 10:11 am | | Public |

The bi-annual real estate issue of New York Magazine had been talking about a crash since 2003. However this year, they apply a more reasonable discussion to the burning question: Why is New York different and how long will it last? (since their new owners took over a few years ago, editorial content has returned the magazine to “must-read status”).

Aside: Of course I love the fact that the average sales price for Manhattan 2Q 2007 presented in the Prudential Douglas Elliman Manhattan Market Overview that my firm authors of $1,333,316 is on the cover (something about loving numbers).

While I am not in total agreement with all the content, it is a refreshing approach because the article tries to present both sides in a best and worst case scenario format. The take away is weighted toward the pessimistic view.

There is discussion of

Hyman Minsky’s ingenious model of asset bubbles, economic stability breeds riskier and riskier investors: First come the “hedge borrowers,” who play with their own money; they are followed by “speculative borrowers,” who have enough cash flow to keep the lender at bay but not enough to cover the principal investment, and finally “Ponzi borrowers,” who are, as the name suggests, borrowing to refinance other debts they can’t meet, in the wild hope that the market will keep climbing.

Of course, New York had very little speculation during the New York housing boom so this applies more to borrowing habits of market participants.

The article references economists I admire and have quoted in the past: Joseph Gyourko, Christopher Mayer, Todd Sinai, Edward Glaeser, Robert Shiller and Nouriel Roubini (whenever I am feeling too optimistic) plus several others. Brad Inman coins the phrase: “Irish Effect.” They also included my friend Noah Rosenblatt, who runs and is someone I recently discussed the housing market for hours after midnight on the tarmac of Atlantic City’s airport on a grounded jetBlue flight from the recent San Francisco Inman conference (how cool is that?).

Worst Case: In this scenario, a full-fledged credit crunch rips through the system. The August employment figures, showing no growth for the first time in four years, are the beginning of a serious downward trend. The economy heads for a hard landing, and an all-out recession ensues.

Best Case: In this instance, the current liquidity problem is contained by the end of the year. Employment figures pick up in September. Global growth continues.

A correction to the article is needed: The widely quoted Case Shiller Index doesn’t include co-op and condo sales as indicated in the article, which is 96.9% of the Manhattan sales market, nor does it include new development and foreclosures.

This just in: Lehman’s net declines, but less than analysts expectations.

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Can We Reach A Freakin’ Quorum About Housing?

August 20, 2007 | 12:01 am | |

Besides having a lot of admiration for the never ending contrarian ideas of Stephen J. Dubner, a la Freakonomics, it provides a great excuse to use “Freakin'” in public and not get scolded or lose my temper.

He gathered 5 real estate veterans to get their take on the questions: Is it finally time to believe in the housing bubble? And how much should the average American care?

He solicited comments from:

Robert Shiller: author of Irrational Exuberance and one of my economics’ heroes, who seems to be more optomistic than his introductions before various interviews would seem to suggest:

It is not clear whether the boom has come to an end; there is still investor enthusiasm out there.

Lawrence Yun: the new chief economist for NAR, who has taken the torch from his predecessor by dissappointingly finding obscure positive elements to expound upon that conflict with each other.

All real estate is local, and there are many local variations…The national median price was 1.1% lower in the second quarter of 2007 than its comparable period the year before….If people want to call the 1% price decline a bubble collapse — well, everyone has an opinion

David Lereah: the former NAR chief economist who gave this job title a bad name. He missed the opportunity to make NAR a trusted resource during the housing boom and post-housing boom periods, re-inventing phrases like “housing expansion” and balloons. A number of my agent colleagues were embarrassed by the things that he said during his tenure.

Bubble is the wrong imagery for today’s housing markets. Bubbles inevitably “pop.” A more useful image for the housing markets is a balloon. Balloons expand and deflate.

Barbara Corcoran: the former head of one NYC’s largest brokerage firms that bears her name. She was a brilliant marketer who really needs to re-connect with the market today. I am thinking that what worked 10 years ago doesn’t work today because I doubt that people believe she is running around the country snapping up property like picking apples from trees. But then again, I don’t understand marketing.

I’m yahoo-ing, low-bidding, and snatching up deals wherever I can find them…I’m grabbing as many over-priced, over-stuffed, and over-rated homes as I can get my greedy little hands on.

Aviv Nevo: one of the authors of the controversial Madison FSBO article who raised a lot of eyebrows with the study for his sharp insight, but also its limited applicability to the national market (not his fault at all). BTW, have you been to Madison lately? and is Jocko’s Rocketship near the football stadium still there?

I don’t know if it is time to believe in a housing bubble, and, frankly, I am not sure the average American should care.

Amir Korangy: founder and publisher of The Real Deal, to whom I have a particular bias, being in their publication a number of times, but for good reason: its a go to resource that is growing fast and has seemingly bigger than a Manhattan White Pages (8 pages of Millers, last time I checked).

Real estate prices are a local phenomenon based on employment, industry, and other factors including climate, quality of education, cost of living, immigration, and crime. Therefore, if the concept of a national housing market is ultimately a false construct, there simply cannot be a national housing bubble.

So why am I rambling about all these commentators in one column by a really smart contrarian economist? Because it speaks volumes about the residential housing market and how we see (or don’t see) it. The commentary represents a world filled with mixed signals, spin (cherry picking), more spin, limited applicability, out in left field silliness and rational thought, which leaves us freakin’ hungry to read more.

Oh, and by the way, I don’t think there was a quorum on the state of housing here.

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Housing Market: Justification To Play With Software Games

April 6, 2007 | 8:37 am | |

The Speculative Bubble Blog uses the stats derived by Robert Shiller which we covered here back in September. (Hat tip to True Gotham) Shiller trends the housing market for 116 years adjusted for inflation.

While this chart is pretty scary looking (duh!), its based on the sales price of “standard existing houses, not new construction” and doesn’t include condos or factor in foreclosures.

I was always taught that you need to plot at least two data points on a chart to make a point, so I’d love to see this index matched against personal income, housing costs as a percentage of personal income or some relationship to leverage to get something constructive out of data series.

Still it makes good fodder for a railroad software game – a very creative application of housing stats – take a ride:


S&P/Case-Shiller Home Price Indices/January 2007 – Dire?

March 28, 2007 | 7:34 am | |

Professor Robert Shiller has leveraged his repeat sales index by developing a new monthly national housing market report with Standard & Poor called S&P/Case-Shiller® Home Price Indices. I find that repeat sales indexes can be very inaccurate and lag the market because they don’t reflect changes in the houses being measured for multiple sales, the data set is too thin, and the response to sudden changes in a market is delayed. This particular report addresses composites of 10 and 20 metro areas so its not really a national housing market indicator since metro areas are distinctly different markets than outlying areas. However, the index seems to address one of their biggest flaws:

Their purpose is to measure the average change in home prices in a particular geographic market. They are calculated monthly and cover 20 major metropolitan areas (Metropolitan Statistical Areas or MSAs), which are also aggregated to form two composites – one comprising 10 of the metro areas, the other comprising all 20. The indices measure changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.

“The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “ The 10-City and 20-city Composites are both showing negative annual returns, a striking difference from the 15.1% and 14.7% returns they reported this time last year. The dismal growth in the 10-City composite is now at rates not seen since January 1994.”

Its the first time in 11 years that home prices go negative. A possible theory for the weakness is relating to the interplay between new home sales and existing home sales. I am not sure I buy into it but its interesting to consider nevertheless.

The lag in timing on this index is really showing the markets around the November 2006 election since the study is based on January 2007 closings. At -0.2% and -0.7% for the 10 and 20 city composite, its is a significant drop from the 15% annual appreciation rates seen a year earlier but not unexpected.

I know economists are paid to worry, and I am not cheerleading here, but does Professor Shiller have to use the word dire in his description?

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Housing Fundamentals Go Boom!

February 12, 2007 | 11:50 am | |

One of my economics heroes, Robert Shiller whose work I have admired (but not always agreed with) wrote a provocative commentary on “Booms” in the Wall Street Journal last week called, interestingly enough: Things That Go Boom [WSJ].

We shouldn’t blame these people for not seeing the boom coming. Nobody did. But those economists who say today that the real estate boom has been justified by “fundamentals” have to explain why they weren’t able to forecast the high home prices we have today based on those fundamentals.

With the failure of anyone really to predict today’s high home prices, one may well conclude that no one can predict today whether a home-price bust is coming, or whether the housing market will land softly, or even is poised to resume its upward climb. That may be the right conclusion about our ability to forecast the markets.

On the other hand, there is another perspective on this colossal failure to predict. Maybe it doesn’t mean that no one can forecast, but instead that the high home prices today are just an enormous anomaly that will have to correct downward sometime, if not right away.

Basically, the premise in his piece is the idea that fundamentals didn’t help us predict the housing boom to the extent that it occurred, which means that fundamentals can’t tell us whether we will have a hard or soft landing either.

Can anyone define what housing fundamentals actually are? The term is always used rather loosely and infers strenuous economic consideration. How about: Employment? Housing Starts? Inventory? Mortgage Rates? GDP? Its seems to me that the list is subject to debate, and the assumption that fundamentals are solid is based on a list that is not universally agreed as fundamental.

Professor Shiller was the creator of the housing index used as the basis for trading on the Chicago Mercantile Exchange last May, which has been characterized as garnering very little interest by investors.


Perhaps the lackluster interest is because it doesn’t include all elements of the housing market including new home sales (a significant factor) and foreclosures (a rising factor). The index predicts price declines in 10 major markets that are currently being covered but it seems like the same sort of experience (in reverse) made by individual investors who could do no wrong in the late 1990’s because every stock was going up.

I lost interest in following the CME price patterns because of the low trading volume. The volume in specific markets seems to be more of the story these days than the reliability of the pricing.

We are left with a deeply uncertain situation, but one in which it would seem that a sequence of price declines continuing for many years has some substantial probability of happening. Traditional finance theory has trouble reconciling even a semi-predictable sequence of price declines with basic notions of market efficiency. The situation we are facing is a reminder of the glaring inefficiencies and incompleteness of existing markets for residential real estate, and may be regarded as evidence that institutional changes will be coming in future years to fundamentally change the nature of these markets.

It doesn’t seem like anyone has a handle of the direction of macro real estate markets at the moment, beyond relying on conventional wisdom. Professor Shiller seems to be moving away, if just a little, from the position that indexes can be used to accurately predict real estate markets, despite his groundbreaking work in this area. He seems to be moving toward the conventional wisdom argument what comes up must come down.


The Science Of Real Estate: The Real Deal At Lincoln Center 3-20-2007

January 15, 2007 | 12:02 am | | Public |

The Real Deal Magazine is hosting its third annual New Development Forum. Last year it was held at Cooper-Union with over 1,000 attendees, a line out the door and many turned away because of limited seating capacity. This year the venue has been moved to Lincoln Center with a seating capacity of 3,000.

I was invited to participate in the panel discussion, and as a big fan of The Real Deal Magazine, I accepted.

Robert Shiller (who is one of my economist heroes – is there such a thing?) will be there as well as Amanda Burden Chair of the NYC Planning Commission and other notable icons in the development industry. The panel will be moderated by Steve Cuozzo, Managing Editor of the New York Post, who did a great job last year in what was a standing room only ruckus of an event.

Click here to purchase tickets.


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