In November of 2011, I wrote a letter to Simon Potter, Executive Vice President and Director of Economic Research Federal Reserve Bank of New York. It said in part:
I must commend you on your very honest report on the failure of the New York Federal Reserve to detect the housing crisis and Great Recession. However, I find it curious that you singled out Nouriel Roubini for warning about the dire economy, but that you did not mention the Austrian School of economics, which seems to have been out front as far as warning about the crisis.
More specifically, my warnings, about the housing market and the Great Recession, I believe can be matched up against any other forecaster. I provide a link to my response to your post, which outlines my reason for this belief: http://www.
economicpolicyjournal.com/ 2011/11/federal-reserve- admits-it-was-complete.html.....
Mr. Potter responded:
Mr. Wenzel:Thanks for the link. I will take a look. Simon Potter FRBNY
Mr. Potter apparently forwarded my email to Richard Peach, Senior Vice President Macroeconomic and Monetary Studies Function Federal Reserve Bank of New York. I specifically called out Peach and co-author Jonathan McCarthy in 2004 at the time they wrote a paper, “Are Home Prices the Next “Bubble”? They concluded there was no housing bubble.
In part, after detailed analysis of their errors, I wrote at the time of the McCarthy-Peach paper:
The faulty analysis by Federal Reserve economists McCarthy and Peach may go down in financial history as the greatest forecasting error since Irving Fisher declared in 1929, just prior to the stock market crash, that stocks prices looked to be at a permanently high plateau.On November 30, 2011, Mr. Peach responded to me after receiving the forwarded email from Mr. Potter:
Dear Mr. Wenzel,
Simon Potter forwarded to me your comment on his recent post on the Liberty Street Economics blog. As you refer to my paper with Jonathan McCarthy quite extensively in your comment, I wanted to take a moment to respond.
If I understand your comments correctly, you indicated that you warned that there was a housing bubble in 2004 and 2005 under a pen name, and then again in 2008. This suggests that you thought the 2004 level of prices were in bubble territory, whereas we though they were supported by fundamentals. We did not conclude in our paper that home prices could rise another 35% to 40%, which they did, and still be supported by fundamentals.
I would like to refer you to the following chart which plots the average FHFA home price by state for 2004 versus the level of 2011Q2. You will note that in most states, as well as for the nation as a whole, recent levels of home prices remain equal to or slightly above the 2004 average level. There are some notable exceptions, in particular Florida, Nevada, California, and Arizona.
Of course, prices may fall further. But as it stands at the moment, your call in 2004 that the level of home prices was in bubble territory does not appear to have been correct.
RegardsThis morning, I sent him the below email:
Dear Mr. Peach,
I have other questions with regard to your ingenious argument that calls Florida, Nevada, California, and Arizona "exceptions". California? Florida?
However, you yourself seem to draw the line at the 2004 national price level. The Standard & Poor's/Case-Shiller home-price index out this morning now shows that prices are, at best, at 2002 levels.
I quote AP on the Schiller report:
"Prices have fallen 34 percent nationwide since the housing bust, back to 2002 levels."
Are you at this point willing to concede that I was correct about my [housing forecast]?
UPDATE: Dick Peach has responded:
You are correct that several national home price indices have declined to 2002/early 2003 levels. Do you think it is possible that home prices are overshooting to the downside?
Also, I was wondering what metric you used to conclude that home prices were overvalued in 2004 and 2005.
Richard W. Peach