Another Reason Not to Trust So-Called Economic Experts

Everywhere you look nowadays, there are plenty of "experts": 1) claiming they "predicted" the current crisis; 2) making forecasts about what will happen next; and, 3) offering "solutions" they say can help return things to "normal."

No doubt some individuals can genuinely take credit for having anticipated the kind of unraveling I've been warning about since I first wrote "The Coming Disaster in the Derivatives Market" in November 2005. They and others may also have some intelligent ideas about wh ere things go from here.

But they are the exception, rather than the rule.

More often than not, the ones who are out there in the public eye spouting "insights" and providing "advice" have no real interest in telling the truth or in giving listeners, readers and viewers the kind of information that can help them make the most of their situations.

Instead, many are charlatans with the gift of gab looking to jump on board the publicity gravy train to puff up their personal resumes, or, more likely, paid shills who dissemble, distort or mislead in the interests of their employers or other interests.

As it happens, the New Jersey Real Estate Report, in a post entitled "Realtor Chief Economist: 'I Spun,'" helps confirm the latter reality with a smoking gun admission (in the latest issue of Money magazine) by an individual who was, for many years, treated by the media and others as though he had something meaningful to say.

AKA: Why you should ignore your Realtor and everything the National Association of Realtors Says

David Lereah was the Chief Economist for the National Association of Realtors [NAR] up until April 2007, the time period otherwise known as the “Bubble.” His outrageously bullish forecasts earned him the name the title: Baghdad Bob of real estate.

His continually rosy forecasts, in the face of a rapidly deteriorating market even led some to start blogs to keep track of his spin, the David Lereah Watch was probably the most famous of these.

Criticism wasn’t coming from bloggers alone, mass media journalists routinely took aim at Lereah, and even his predecessor Larry Yun, one of the most scathing appeared in Slate:

Worst. Forecasters. Ever?
By Daniel Gross
Posted Monday, Dec. 10, 2007

As the housing decline began to take center stage, NAR forecasts were an important market event. This spurred investment research firm Investech Research to publish this gem:

Our own RentingInNJ came up with his own compilation, which spurred the wildly popular (one of the most widely linked and traffic’ed NJREblog posts ever):

Tracking Realtor Spin

1. “There’s no question there is a strong demand for housing from a growing population.” - David Lereah, NAR Chief Economist

2. “For the foreseeable future, the demand for homes will continue to outstrip supply” - Al Mansell, NAR President

3. “We’ve been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream.” - David Lereah, NAR Chief Economist

Which leads up to the January 2009 issue of Money Magazine, where Lereah admits what we’ve already known:

Former real estate bull admits, “I spun”
Working for realtors, David Lereah was famously optimistic. Not anymore.
By Donna Rosato

As chief economist for the National Association of Realtors, David Lereah was famously optimistic. Now a private consultant, he’s abandoned what he calls the “positive spin.”

Q: Were you wrong to be so bullish?

A: I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right inline with most forecasts. The difference was that I put a positive spin on it It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.

Q: The NAR’s latest forecast calls for a slight increase in home prices next year. Thoughts?

A: My views are quite different now. I’m pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we’ll see a very modest recovery in sales activity in 2009. But we’ve still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It’ll take a long time to get back to the peak prices we saw in many markets.

Q: Any regrets?

A: I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

Some fun threads from back in time:

The Big Picture: NAR and Housing Forecasts

San Diego Home Blog: Spin Class - David Lereah and NAR

Matrix: David Lereah Resigns, Spin Takes A Smoke

Patrick.net: Is David Lereah going to Hell?

The Mess That Greenspan Made: NAR Housing Report: Declining Home Prices Induces Heavy Spin

Housing Panic: David Lereah, the most discredited economist in world history, finally admits housing crash going to get worse, expects US home values to plummet 20%

Comments

[Trinitymaster:]

95% of people on the street knew that this disaster was imminent. We have all seen similar scenarios in the past.

1. Real Estate prices went up for no good reason whatsoever.
Anyone remember the late 1980's when California Real Estate dropped 50% in one year? Maybe you can ask a farmer who lost his land when he borrowed $3000/acre against ground that was actually worth $500/acre.

2. Let's talk about 1973: The stock market collapsed in January (predicted by every poor adult that I knew at the tender age of 6), OPEC imposed the Oil Embargo in October of that same year and oil went through the roof. However, it skyrocketed because of perceived shortages- not actual ones (The USA imported less than 15% of its oil from the Middle East).

And what was the Central Banks' response? You guessed it- They cut interest rates which only made things worse.

My Predictions:

1. This Mortgage Crisis is nothing compared to the coming one. With new homeowners buying at artificially higher prices, caused by artificially lower interest rates, house values will crash when mortgage rates increase.
The only solution is to raise interest rates up to 3.5% (compared to 0-.25%) causing mortgage rates to rise to 7%. It'll hurt many in the short term, but save all of us in the long term.

2. The DJIA is headed to 7500 or lower, and then up to 25,000. And then back down to 14,000.

And these, my friends, are my optimistic projections.

2008 Dec 21 12:44 PM

[babycondor:]

"The DJIA is headed to 7500 or lower, and then up to 25,000. And then back down to 14,000. " -- Trinitymaster

Over what time frame?

2008 Dec 21 01:53 PM

[L Moore:]

I should trust you because?

a. you are not an expert
b. you are a different kind of expert from the ones you demean
c. you are a non-expert with some other credible traits (such as?)
d. you waste my time less than others
e. I was bored after the first paragraph and stopped reading

2008 Dec 21 08:56 PM

[carey_jim:]

If you've been in this game long enough, you notice that most financial and economic prognosticators work with the assumption that investors have very short memories or can, at most, remember only one major prediction.

Therefore, one type of prognosticator makes make many, many predictions so that, because of the law of averages, some of the predictions will necessarily turn out to be correct. He/she relies on the assumption that most people will forget the false predictions.

It's too bad that most of these financial "experts" are not uncovered for the shameless losers that they are, but people seem to need experts and, apparently, refuse to listen.

Another trick some "experts" use is to make ONE big prediction every year.

After the first year, by the laws of probability alone, there is a fifty-fifty chance he will be right. The next year, there is a 25% chance he will be right both years and so on.

3% of these financial gurus will be right (by the laws of probability alone) for five years running and gather a huge crowd of impressed investors around them.

If you add in eclectic financial experts who use both both methods, you just about cover the entire field of financial and economic prognostication.

2008 Dec 22 01:08 PM

[Trinitymaster:]

7500 or lower- by mid February

25,000 after Obama's first term (2014 I would imagine)

Crashing like a meteorite sometime around 2017

We are in the second year of a SEVERE ten year downturn.
However, if we have a major war involving 8 or 9 countries, then we might only go down to 11,000 after we hit the modified high-point of only 16,000.



On Dec 21 01:53 PM babycondor wrote:

> "The DJIA is headed to 7500 or lower, and then up to 25,000. And
> then back down to 14,000. " -- Trinitymaster
>
> Over what time frame?

Jan 08 12:40 AM