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A Look at Who Got it Right or Wrong in 2007


"Back to the Future." Lon Witter called it over a year ago whe he predicted the mortgage market melt down. Indeed, 2008 will be worse than 2007. That means if you are a seller, sell your real estate now. If you don't, you will be chasing the market down hill for the next 12 to 24 months. While we will not repeat the debacle of 1998 through 1992, 2008 will be ugly for virtually every real estate asset class. - Ed Klein

"How experts' predictions nailed--or missed--the fallout from the subprime debacle"
By Jen Benepe

December 2007


It was a crazy year -- the residential mortgage market went into crisis, the housing market got weaker in the U.S. (even though the city stayed relatively healthy), and the commercial market started showing signs of slowing too. Who would have thought? Read on to see The Real Deal's check of the forecasters. Here's who got it right, and who got it wrong.

The predictions range from dead-on to dead wrong. Former chief economist of the National Association of Realtors, David Lereah, for example, last year titled a book he wrote "Why the Real Estate Boom Will Not Bust," as the national market started taking a beating. On the flip side, there was Lon Witter's famous piece in Barron's predicting the fallout in the mortgage industry.

David Lereah former chief economist, National Association of Realtors

Predictions: Lereah was one of the most prominent boosters of the residential real estate market during the boom in his stint at the National Association of Realtors in 2005 and 2006, but he was derided by some critics as wildly over-optimistic, and perhaps irresponsibly so. In 2005, he published a book titled, "Are You Missing the Real Estate Boom?" In 2006, even as the national market started to slow significantly, it was updated and re-released as "Why the Real Estate Boom Will Not Bust." This year, Lereah published a new book, "All Real Estate Is Local."

Reality: Since the national housing market started slowing two years ago, conditions have certainly disproved Lereah's notion that "the real estate boom will not bust." Housing starts in the U.S. have fallen to a 14-year low. Economists expect the housing market's slowdown to be a drag on the economy next year. Lawrence Yun, Lereah's successor at NAR, has forecast the national median price for a previously owned home to fall by 1.3 percent in 2007 -- the first drop since the Great Depression.

Comment: Lereah, now an executive vice president at Move Inc., could not be reached for comment.

Michael Youngblood managing director of asset-backed securities research, Friedman Billings Ramsey & Co.

Prediction, June 2006: Unveiling a new economic model, which he claimed was more predictive than other methodologies out there, Youngblood forecasted that national housing prices would rise 3.5 percent year over year in the first quarter of 2007, while New York City would jump 17.5 percent.

Reality: While Manhattan apartment prices did rise by 7.3 percent per square foot, the average sales price remained roughly flat over the forecasted period. In the greater New York area, the S & P/Case-Shiller index, which measures home prices nationwide and which does not include apartments, fell 1.1 percent from the first quarter of 2006 to the first quarter of 2007.

Comment: Youngblood could not be reached for comment by press time.

Jonathan Miller president, Miller Samuel, recently acquired by Radar Logic

Prediction, October 2006: Miller forecast national housing weakness, citing flaws in how money is lent: "I have long vented about the perils of weak underwriting standards and the pressures placed on appraisers by the structure of the lending system, namely collateral valuation." Also in 2006, Miller drew on work by Lon Witter, an investment strategist, and Barry Ritholtz, a research strategist, to complain about an "appraisal inflation problem ... much more serious than reported."

Reality: In summer 2007, the New York State attorney general's office asked many appraisers to submit a formal declaration that they had been pressured by the lending community to provide specific appraisal results. Last month, Attorney General Andrew Cuomo announced that he was suing First American Corp. and its subsidiary, appraisal company eAppraiseIT, for allegedly colluding with Washington Mutual. Cuomo accused eAppraiseIT of inflating the value of homes it appraised for mortgages, under pressure from WaMu. He said that the case is just one example of a "systemic flaw in the mortgage industry" with far-reaching implications.

Comment: "I am thrilled it is on the front burner now," Miller said of the attention now being paid to problems in the appraisal industry.

Lon Witter founding partner at Witter & Westlake Investments

Prediction, August 2006: Citing that 32.6 percent of new mortgages and home equity loans in 2005 were interest-only, up from 0.6 percent in 2000, Witter penned a famous article in Barron's, predicting a drop in the real estate market and comparing the situation to the junk-bond era of the 1980s. "Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan," he wrote.

Reality, December 2007: The nation's mortgage market has been shaken by increasing numbers of subprime defaults.

Comment: Witter noted that more than $1 trillion in adjustable-rate mortgages are scheduled to reset in 2007 and 2008 at an average of 2 percent higher than the present rate. "Foreclosures will rise dramatically," predicted Witter, who noted that he expects the next three years to yield a 30 percent drop in housing prices.

Maria Sicola executive managing director, research, Cushman & Wakefield

Prediction, December 2006: Aggressive rent growth in Midtown Manhattan for 2007, forecasting rent averages of $75 per square foot.

Reality: In June, average Class A rent for Midtown Manhattan reached $80.88 per square foot. In the third quarter, the figure stood at $81.74 per square foot.

Comment: While the commercial leasing market appears to be showing signs of slowing, particularly in terms of leasing activity and big deals signed, over the past year, Manhattan rents have risen appreciably enough that Cushman & Wakefield added a new category, properties offered at $150 per square foot. Fourteen properties had hit this mark or higher by October.

Copyright © 2003-2005 The Real Deal

By: Brian J. Markowitz
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By: Brian J. Markowitz
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