Friday, January 18, 2013

FOMC Transcripts: Housing Edition

The transcripts from the 2007 Federal Open Market Committee (FOMC) have just been released. These transcripts are released with a five-year lag. Naturally, economists and pundits are excited to see what people at the Fed did or did not know back then about the state of the economy and impending financial crisis.

The transcript from the January 30-31 meeting includes multiple discussions of the housing sector that suggest awareness of problems, but underestimation of their depth and duration. I've pasted some interesting housing remarks from the transcript at the end of this post. To accompany those, I took a look at what was actually forecast about housing, both at the Fed and by professional forecasters.

Fed forecasts in the Greenbook are also only available with a five-year lag, but the Survey of Professional Forecasters forecasts are available with hardly any lag. In the graph below, the thick navy line is actual housing starts (in millions of units) per quarter. The green line is the Fed's Greenbook forecast made one year earlier for housing starts in that quarter. The dashed line is the same forecast, made by professional forecasters (the median SPF forecast).

You can see that throughout the housing boom, both Fed and professional forecasters consistently underestimated housing starts. Housing starts started to fall in the second quarter of 2006 and have yet to recover to anywhere near their 2006 peak. Look at 2007 in the graph. The blue line is below the red line and far below the green line, which were the forecasts made in 2006 about 2007. I'll update the graph with Greenbook forecasts made in 2007 about 2008 when those are put online.

Here is another graph that shows Greenbook forecasts for housing starts made at multiple horizons. If you draw a vertical line up from a particular date, you will see forecasts made 1 quarter, 1 year, and 7 quarters earlier about housing starts at that date.

Quotes about housing starts in the January 30-31 transcripts:

Mr. Slifman: As I noted earlier, the leveling-off of home sales, the uptrend in mortgage applications, and the improvement in homebuying attitudes suggest that housing demand may be leveling off... cyclical recoveries in sales and starts have generally been fairly coincident historically...Accordingly, we think that the recent stabilization of sales should be accompanied soon by a stabilization of starts.
Mr. Stockton: As Larry said, even given the overall dimensions of the housing shock, we've been encouraged about our story of stabilization.  But I remember that, as we went into the investment shock earlier in this decade, we just didn't have enough imagination about how bad things could get, and we kept thinking that we were seeing signs of slowing or stabilization, that the new technology was still great, and that there should be reasons or underlying motivation for investment.  Perhaps what we've seen recently as stabilization are the beneficial effects of the drop in long-term interest rates that occurred from last summer into the fall and pulled some people forward, but really we may not have fully made the adjustment yet.  The overhang of unsold homes out there is very large, and we could be underestimating the size and duration of that.     
Mr. Stern: The housing sector is subdued, but the District data on sales and starts suggest stabilization, as do the national data.  The data on the inventory of unsold homes perhaps are contradictory to that statement because there are still a lot of unsold properties; at least those data suggest that it will be some time before there is any pickup in housing activity.  In any event, as Bill Dudley mentioned, mortgage delinquencies and foreclosures are rising, albeit starting from a fairly low level, and though that probably won’t have a significant effect on economic performance, it could be a political issue in Minnesota and elsewhere in the District.
Mr. Fisher: I did talk to two of the top five housing CEOs and a third one, a smaller company.  They seem to confirm the sense of the staff in that they feel that the housing situation is bottoming out, but they continue to caution that any reading of the housing industry between Thanksgiving and the Super Bowl is of questionable value.

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