Dean Baker: No One Should Have Been Surprised by the Plunge in Home Sales

(Aug. 25) -- Whenever there's housing news, I turn to economist Dean Baker, one of the few to foresee the housing bubble, for insight. He takes issue with this sentence from today's Washington Post story: "Analysts had expected sales to decline following the expiration of a federal tax credit for homebuyers this spring, but the drop was nearly twice as large as forecast."

"Forecast by whom?" is the question. Baker says this plunge was easy to predict, just as the housing bubble was, by looking at the available data:

The 27 percent drop in sales is very much in line with what would have been expected given the sharp falloff in applications for purchase mortgages in May. The vast majority of people who buy homes need to get a mortgage. If they are not applying for mortgages, then the odds are that they are not buying a home. Given the 6-8 week lag between applying for mortgages and the closing of a home sale, it was entirely predictable that this plunge in sales would show up in the July sales data.

The only surprising part of this picture is that professional economists somehow were surprised. Of course most of these people also missed the $8 trillion housing bubble.

If you're interested in learning more about Baker, co-founder of the Center for Economic and Policy Research in Washington, I wrote a long magazine profile of him earlier this year. Suffice it to say, he knows what's up.