Redfinās 2024 housing market predictions are out, written by me. Every year, I am asked what my predictions are for the housing market, and every year, I struggle to answer that question. Thatās because economists have a different conception of what a prediction is compared to normal people.
In econometrics, a prediction is a predicted variable, which is the output of a statistical model that takes in observable data. If I want to predict the share of people in the United States with blue eyes, I would take a random sample of people in the U.S., calculate the share of people in that sample with blue eyes, and then use that as my predicted share for the entire United States.
I could then use that prediction to make a guess about the future. If you asked me whether the next winner of the Mega Million jackpot will have blue eyes, I would āpredictā that the winner will not have blue eyes based on the statistic that only 27% of Americans have blue eyes.
But most people donāt think about predictions the way economists do. They envision a clairvoyant looking into a crystal ball and seeing the true eye color of the next lottery winner. This kind of prediction can magically foresee an unlikely scenario where the winner does have blue eyes, even when that outcome is unlikely from a statistical standpoint.
I donāt pretend to see the future. I know my predictions will often be wrong because even the best predictions are often wrong. I know that the prediction that the next lottery winner wonāt have blue eyes will be wrong around 27% of the time.
And right now, given how uncertain and volatile the economy and financial markets are, there is a very high likelihood that my housing market predictions will be wrong.
But people will still ask me for my predictions, and since itās my job to study the housing market, itās my job to answer, even if itās with an answer that will probably be wrong. Since economists base their predictions on data and not premonitions, they are the most trustworthy people to ask for market predictions, even if we donāt like being asked.
Your 2024 prediction is so fun and very interesting! Have you ever done a look-back and compare what actually happened with your prediction just for fun? For reference: https://www.npr.org/transcripts/1145641398
I appreciate your perspective Daryl. As an actuary, my predictions are often wrong, in the sense that they are not exactly right. But still they are valuable. In estimating how much claims reserves a health insurer should hold, for example, it's not just the best estimate that is important, but also the estimated variability. In setting the reserve I would consider what amount would be adequate let's say 80% of the time or more. There are various financial and regulatory complications, but it is understood that the estimate will rarely if ever be spot-on.