Beware of Economists Bearing Projections

In light of the significant difficulties affecting not just real estate but virtually all segments of the economy, does it makes sense to buy a home at all?

The fact is: People are buying. Perhaps not as many, and perhaps they’re spending less. But if someone needs a home, plans to live in it for a while, and has a stable income and likelihood of continued employment, buying certainly can be the right decision.

On the other hand, some of the recent run-up in prices in 2002-2005 was due to buyers speculating that prices would continue to go up not based on fundamental reasons—such as people needing housing or a growth in the area’s population—but rather due to misguided projections, questionable calculations, and an unjustified faith in so-called experts.

Earlier this year, someone gave me a series of quotes from years past to “prove” that dire real estate projections often are unfounded. The quotes were funny because they were wildly inaccurate. For example: “The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.” (Time, December 1, 1947).

Or this one: “Financial planners agree that houses will continue to be a poor investment.” (Kiplinger’s Personal Financial Magazine, November 1993)

Recently, I’ve been receiving a steady stream of “good news” projections that are proving to be just as wildly inaccurate, if not quite as funny. For example: “Economic Recovery Already Underway: The credit crisis is indeed mending….So what if there was some excess home building and home buying? So what if some stupid banks made some stupid loans, and some stupid home buyers took those stupid loans and now can’t pay them back? It’s a problem, I suppose. But in the end it’s a side show. The economy marches on.” (Donald Luskin, Trend Macrolytics. April 18, 2008)

 Or how about this one: “Don’t break out the champagne glasses quite yet, but there are more economic signs this week that the worst is over for the three year real estate correction cycle. One of the country’s most prestigious groups of marketing forecasters, the National Association of Business Economists, says housing and consumer credit conditions will stabilize and begin improving as the year moves on. Equally important, said Ellen Hughes-Cromwick, chief economist at Ford Motor and president of the association: The entire U.S. economy will ‘slowly return to health’ this year.” (Kenneth Harney in Realty Times. May 22, 2008)

Long-term, real estate historically has been a good investment. But whether it is right now, for you, is a decision that’s best made by you, based on your own situation. Don’t rely on broad estimates or projections by economists to make that decision. They’re proving to be just as inaccurate today as they were 50 years ago.

Since we’ve been focusing on economists, let’s end on this note:

Three economists went out hunting, and came across a large deer. The first economist fired, but missed, by a yard to the left. The second economist fired, but also missed, by a yard to the right. The third economist didn’t fire at all, but shouted in triumph, “We got it! We got it!”

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