Why most economic forecasts are useless

Worthwhile Canadian Initiative writes:

Suppose instead that the model has a consistent one period lag, so Y(t)=R(X(t-1)). And suppose that Statistics Canada reports all data on X immediately. Now we can use the model for genuine forecasting of the future. Statistics Canada tells us what X is today, and we use the model to tell us what Y will be one period in the future. But the model can tell us nothing about what Y will be two periods in the future, because Statistics Canada can't tell us what X will be one period in the future. And yet I keep hearing about model-based forecasts for one, two, three, four, etc., periods in the future.

Steve Malpezzi, Walter Barnes and I wrote a paper some years ago that tried to come to grips with this very issue.  The context was office market forecasts, and we worked on developing confidence intervals for estimates of future office demand for a number of metropolitan areas.   In developing the confidence interval, we used a technique from a 1971 Martin Feldstein Econometrica paper that takes into account the fact that to forecast Ys, one needs to forecast Xs as well.

To make a long story short, after a couple of quarters, the confidence intervals blow up (I don't have the paper at home, but when I go in to the office this week I will scan some pictures from it), meaning that after a few quarters, metropolitan office demand could be just about anything.  Local office markets are much less complicated than an entire national economy.

Scariest thing I have learned over the past 48 hours.

Sometime within the next five years, half of LA's city budget will go to pensions.

Real Estate Possession Types

Real Estate Possession is the interest an individual has in a particular piece of real estate. Real Estate Dictionary has identified 4 types of real estate possession categories: Freehold, Lease Hold, Statuatory, and Equitable. These categories are very simple to understand.

The first category Real Estate Dictionary identified is freehold. This is the most common type of Real Estate possession. This means that an individual owns that rights to immovable land for an undetermined amount of time. An example of a freehold estate real estate possession would be an individual purchasing a home that does not have any restrictions on it. Restrictions will be discussed in further detail later.

The second type that Real Estate Dictionary identified was a lease hold Real Estate possession. This is an interest in real estate where the rights are limited. This is not ownership but ownership to certain rights granted by the person who has a freehold interest. An example of this type of real estate possession is an individual renting a house or an apartment for a certain time. There are many types of lease hold estates that will be discussed in further detail later.

The third type that Real Estate Dictionary Identified was the statuatory possession. This is a form of Real Estate possession that deals with community property. This type of deals with the legal rights of married couples mostly. This is a term that implies that a husband or wife has an undivided interest in the property.

The final type Real Estate Dictionary identified was the equitable estate. This type of estate is not an ownership in property or any possession but a claim on the property. This type deals with liens and easements. Liens and easements will be covered in further detail later. Examples of equitable estates are a contractor not being paid attaching the debt to the property owner. This means that when the house sells the contractor gets paid. There are many types of liens and priorities. Easements are the rights to access a property for certain reasons. An example would be a road that goes through a property to access another property. Easements will also be defined and further described later.

By now the Real Estate Dictionary should have given you a basic idea of the different types of real estate possession types.

Real Estate Ownership Types

What is Real Estate

The most important definition of the Real Estate Dictionary is Real Estate. Real Estate Dictionary concludes that it is any land and immovable property that lies on that land. Examples of Real Estate are a house, yard. Real estate is any land and man made improvements permanently attached to the land. There are many types of land and improvements. It is important that with every post you read not overwhelm yourself with trying to define exactly what constitutes what definition. This log will flow consistantly from one topic to the sub topic. immovable property and improvements will be explained in further detail on the real estate encyclopedia. Real Estate Dictionary home.

Ugly University Buildings I have Known

I have spent a fair amount of time at six universities as a student or faculty member.  Five have astonishingly ugly buildings.

We begin with Mather Hall (below left) at Harvard: the Robert Taylor Homes of college dorms.  On the right is USC's Hoffman Hall, which was actually designed by a great architect, IM Pei.  It shows we all have bad days.

Next we have the Academic Center at George Washington (below left).   The photo makes it look nicer than it is.  Huntsman Hall at Penn is the new Wharton Building.  It is a little, er, out of scale for the surrounding neighborhood, but if Philadelphia ever returns to an agriculture based economy, it will have a really nice silo.  

Finally we have the Humanities Building at Wisconsin.  My understanding is that this ironically named building will soon be torn down.  That will certainly produce addition from subtraction.




The Indian School of Business was designed by John Portman, and is simply beautiful.

Housing Inventories

The bad news for the US housing market: despite strong resales in April, the country had about 8.2  months of inventory. For real house prices to stay stable, inventories need to be in the four to six month range, and because inflation is nearly non-existent for the moment, downward pressure on real prices means downward pressure on nominal prices as well. This could be a problem for a housing market that had relied so heavily on FHA loans, which have lax downpayment requirements.

Things here in California are better:

The data come from CAR.  Inventory under $500K is pretty thin, meaning that even if there is a shadow inventory that comes on line, California should be able to avoid much in the way of further price declines.  Just as interesting to me is that while the $750K+ inventory is still pretty large, it has shrunk pretty dramatically.  I actually wonder how these houses are getting financed--are there that many affluent buyers with cash?  When I talk with lenders, they are telling me that to get a decent rate at $1 million+, buyers need at least 25 percent down, and sometimes more.

Sarah Ritchie reminds me that today the Brooklyn Bridge is 127 years old.

Every time I visit New York, I am stunned at what a remarkable human accomplishment it is. I think there is a pretty good chance that among the most important contributors to that accomplishment are its bridges and tunnels.

I cannot think of any city in the world with remotely as many impressive bridges. The names roll off the tongue: Brooklyn, Manhattan, Williamsberg, 59th Street, George Washington, Verrazano, Throg's Neck and Whitestone. London, Paris, Rome and Seoul have very nice bridges, too, but because their rivers are so much narrower than the East (yes, I know it's not really a river) and Hudson, the bridges don't quite so stir my imagination. San Francisco's bridges span great distances, but there are only two that are impressive (the San Matao and Dumberton bridges are just strips of pavements on pillars, and the Richmond Bridge is, well, "interesting").

So happy birthday to Brooklyn Bridge, the first of a wonderful family.

Annoying anti-car headline of the day

From Richard Florida's twitter feed, I get:

One Hour Spent Driving = 20 Minutes Lost Life Expectancy:

So let us think what this means for people who drive one hour per day every day for 60 years. Expected life expectancy is reduced by 60 years times 365 days per year times one hour times 1/3 hour of life lost per hour of driving. This all comes to 7227 hours, or about 300 days. So driving every day for one hour means we lose 10 months of life expectancy (move these numbers around as you wish).

But what if we weren't able to drive at all (and buses and shared-rides vans count as forms of driving)? I am guessing we would be much poorer--mobility has at least something to do with our affluence. Maybe we wouldn't be as well nourished. Maybe we would face more economic stress. I can't be certain, but I would be willing to bet that if we stopped driving altogether, our life expectancy would fall.

I have long supported Pigou taxes on the negative externalities created by automobiles. I support subsidies for transit as a matter of social justice. But do I think cars have provided a net benefit to living standards and life expectancy? Sure!

David Barker comments on the growth path of GDP

He writes:

I just did a quick Chow test to see if there is a structural break in per capita GDP growth between 1935 and 2009 and there is not.

This is just a growth over time model (log GDP on time), and I also checked consumption and disposable income. If I did it right, there are no breaks - not even close. So you are right about Wallison, but one can't draw the opposite conclusion either.

I think in general it is difficult to draw casual inferences about macroeconomic data. More specifically, I agree with David that there is not sufficient statistical evidence to ascribe a cause to the relatively weak performance in growth after 1980. I do think rampant deregulation of financial institutions has been on net harmful (we seem to have financial crises more frequently now), but we haven't sufficient numbers of data points to establish that fact scientifically.

But it is also true that what Wallison wrote is demonstrably false. Life was not barren in the pre-Reagan years, and it has not been the land of milk-and-honey since. The evidence, limited thought it may be, is consistent with the idea that the New Deal was a good thing. On the other hand, Wallison wears very nice suits.