BEHIND THE NUMBERS: Wrong Or Lucky
“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
BY: AL SHERMAN
Mostly we view forecasters—economic, weather, or otherwise (or other unwise?)— with good-natured skepticism. We deride them. We make fun of them. And why not? They invite it. The saying goes—and the fact is—forecasts (and forecasters) are either wrong or lucky.
Still, before we leave the house, we check to see what the weather guesser has to say. And before we build a budget, write a long-range plan, or make a major investment decision, we dig around for the housing forecasts.
Suddenly, forecasts are important. That doesn’t mean they’re any better than when we were joking about them. It only means that we need something on which to predicate our decisions. Anything—any quotable source—even if that source has a shaky track record.
The fact is, we need to have some idea of how the economy and our industry are likely to behave going forward before we make a major decision—before we commit our time, our talent, and our money.
A big part of the problem with forecasts lies in our expectations. We think well-educated, ivory-tower types, using sophisticated statistical techniques and adding their thoughtful assumptions about the future, should be able to tell us what’s going to happen. We expect them to get it right.
That’s a pretty high bar to reach—and it’s a little unfair.
Forecasters use historic relationships to predict the future. Their models are very sophisticated—but they’re mathematical. Simply put, they fit lines to data points. When new and different happens, these models don’t work so well. And exogenous, one-off events don’t enter into the equation.
What if we were to stop demanding so much from forecasters? What if we didn’t expect them to be accurate in both direction and magnitude? What if we were happy if they just get the direction right?
If forecasters suggest that a few good years lie ahead, and if we independently see the same, then we should have more confidence in the future. If they’re expecting strength ahead, and our opinion is that the market is about to turn down, then we should be less likely to accept their opinion and walk away from risky bets. If they’re expecting a downturn and we’re not, let’s revisit our reasoning— and take a much closer look at theirs.
What we don’t want to do is pin our future on their predictions without making our own assessment. And we should want to see confirmation of our opinion from other sources before assuming we’re right.
So now we settle on a forecast that combines what we think with what they think about housing over the next few years at the macro level.
But this is only a starting point. What happens nationally or regionally is generally representative of what’s going to happen in local markets—but not ALL local markets, and not to the same degree. The question we need answered is: What is our market going to look like going forward? No forecaster can know our market as well as we do—or as well as we should. We have direct access to local information. We have insights that they don’t have. It’s our market. We’re in the middle of it. We should start with the macro forecast as a base and improve it with our local knowledge.
So let’s look around. What are we hearing from builders in our market? Are there major commercial plans in the works? What about infrastructure projects? Which way is employment headed—are there any major employers entering or exiting the market? And let’s not treat information as anecdotal—let’s try to quantify it. Then lay it out in an organized way so we can draw objective conclusions.
Decisions on major initiatives and capital expenditures should be predicated in part on housing forecasts. If things look positive in the out-years, those significant expenditures and initiatives will seem inviting. If housing looks as though it may take a tumble soon, we probably want to put them off.
Yes, I talk a lot about the housing cycle. There’s been some mention of it in every column I’ve written so far. That’s because there’s no issue more important when it comes to making major investment decisions. I’ve said it before and I’ll say it again—and probably again and again: It would be great to have accurate housing forecasts—indisputable, infallible numbers. But that’s not going to happen. So let’s get value from what we can have. The important question is not so much what next year’s numbers will be, but how long it will be before the next turning point.