July 16, 2004
News & Opinion: Beating the Business Cycle - Our Record
Our record of forecasting cyclical turns is pretty good. But I must say its not because we are particularly smart. Rather, its because we have quite a bit of faith in the fundamental theory behind our leading indexes, and therefore we dont try to second guess them. Housing prices are a good example. Typically, when the economy turns down, home prices follow. 2001 was the first global recession in a generation so surely home prices should fall, right? Well, I sure thought so until I took a close look at what our Leading Home Price Index (LHPI) was doing. In past recessions it had turned down signaling the aforementioned declines in prices. But this time it kept growing. We checked our skepticism and forecast a continued rise in home prices in spite of the recession. In early 2003, when people were calling for the home price bubble to burst, the LHPI started continued rising strongly, and our outlook reflected this. Currently the pace of increase in the LHPI has eased, but it is not falling. So, while there almost certainly is a decline in home prices somewhere in the future, it is not imminent.