Merrill Lynch Housing Forecast – Prophets or Fools

Blindfolded Forecaster

Merrill Lynch Housing Forecast – Prophets or Fools

Merrill Lynch, the large financial firm whose previous predictions resulted in a $7.9 billion loss in their third quarter of 2007, has released a new forecast. Merrill Lynch is forecasting a 25-30% drop in national housing prices in the next few years.

I’m forced to wonder about Merrill’s reasons for issuing such a forecast. I can’t see a practical reason for issuing such a forecast. Merrill Lynch has a new, probably interim, CEO who replaced the last CEO because of problems with accurate forecasts of their own losses. They initially reported expected losses of about $2.3 billion in the third quarter of 2007. Later, they revised the number to about $8 billion, the final reported result was $7.9 billion.

So, how seriously should we take a forecast from a company whose internal predictions, betting shareholders real money, results in losses of $7.9 billion in one quarter? This is one of the companies that caused the market crisis that we are seeing now.

I attended a briefing this morning in Daytona Beach, where Lynn Reaser, the Chief Economist and Managing Director of Bank of America, reported that real estate price drops in Volusia County should bottom out in the next few months.

So there we have it — two poles. One forecast that we can see a drop of 30%, another saying that the drops are nearly over. Who is right? Who do we believe? What do we do?

I believe, like most everything, that the answer lies somewhere in between. Time will give us the answer. In the Daytona Beach market, home prices were artificially pushed higher by speculators. We are not certain by how much. We’ve seen drops of about 12% since early 2007 (see more on Daytona Beach Home Price Trends here), with recent flattening of the drop.

In the meantime, every buyer and seller must review their own situation. You must do everything possible to protect your best interests. Review your situation with your advisers, including your real estate agent/broker, financial planner and accountant.

We are certainly living in interesting times.


  1. […] media sometimes makes it appear as though housing prices are crashing. See my post about the Merrill Lynch forecast. In our area home prices are declining, but 8.2% in 2007 is an adjustment, not a crash.  We still […]

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