Friday, December 26, 2014

Requiem for a wager

 - by New Deal democrat

One year ago I had a significant difference of opinion from Bill McBride a/k/a Calculated Risk, and just about the nicest guy in the econoblogosphere, about the direction of the housing market.

Based mainly on interest rates, I wrote that:
Bill... is looking for stronger economic growth in 2014 in part because he expects that "the housing recovery should continue."  Unless the interest rate spike that began in April 2013 abates, I disagree that the housing recovery will continue, and that will have a negative effect on growth rates by the end of 2014.... 
[A] rise in 1% in interest rates YoY almost always leads to a decline of 100,000 or more housing permits a year, with usually no more than a 6 month lag.  The only 3 exceptions are in 1968, for a short period between between the two parts of the "double dip" 1980 and 1981 recessions, and during the 2004-05 blowoff phase of the housing bubble.
Based primarily on demographics, Bill said that:
I expect growth for new home sales and housing starts in the 20% range in 2014 compared to 2013. That would still make 2014 the tenth weakest year on record for housing starts (behind 2008 through 2012 and few other recession lows). So I expect further growth in 2015 too.
 Given our very different forecasts, we made a charitable wager. If permits, starts, or new home sales were down -100,000 YoY in any month, Bill had to make a charitable donation.  If any of those metrics were up by 20% YoY for even one month, I had to make a charitable donation.

Here's what actually happened in the first 11 months of 2014 compared with 2013:

  • Permits averaged 990,000 in 2013. So far in 2014 the have averaged 1,020,000, for a gain of 3%. Their worst YoY loss was -8000 in January.  Their biggest YoY% gain was +8% in March and July.
  • Starts averaged 930,000 in 2013.  So far in 2014 they have averaged 990,000, for a gain of 6%. Their worst YoY decline was -77,000 last month.  Their best gain was just over 20% YoY in April.
  • Sales of single family homes averaged 431,000 in 2013.  So far in 2014 they have averaged 433,000, for a gain of less than 1%. Their worst YoY decline was -60,000 in March.  Their best gain was +15% YoY in August.
Since starts had a 20% YoY gain in April, I made good on our wager by donating to Tanta's memorial fund. In the larger picture, however, neither one of our forecasts came to pass.  Permits were never down YoY anywhere near -100,000, and the 2014 average for starts and sales were nowhere near +20%. I have gained a healthy respect for the importance of demographics, and if I read Bill correctly, he has begun to highlight the important effects of even a small change in interest rates.

I'll have a more detailed look at permits, starts, and sales for November up at later today.

I suspect our 2015 forecasts for housing will be much closer, but who knows, maybe there will be room for another wager!