Telling Good Analysis from Bad

Bulls have opinions; bears have opinions. How do can you tell who’s opinion is more likely to become future reality? What characteristics are exhibited by an analysis with good predictive power versus those without? How do you tell the difference between an opinion based on emotion, fantasy and wishful thinking from an opinion based on a rigorous, unbiased examination of the facts? These are the questions I wish to explore today.

As part of my job, I obtain market studies to evaluate various land uses for specific pieces of property. Based on the quality of the information in these reports, I make and implement recommendations on the purchase and development of multi-million dollar properties. If my analysis is faulty, or if I fail to recognize a faulty analysis in a report upon which my actions are based, the project’s investors will not meet their financial objectives. In short, if I mess up my analysis, people lose money.



The easiest way to demonstrate a good analysis from a bad one is to directly compare a good one to a bad one and note the key differences. For an example of a good analysis, I will use The Anatomy of a Credit Bubble, not because it is so great, but because I know it very well. For an example of a bad analysis I will use Gary Watts Real Estate Outlook 2007 because he has achieved local fame, and because his analysis is terrible.

Accurate Data

The first thing an analysis must contain is accurate data which is verifiable. Garbage in, garbage out. For The Anatomy of a Credit Bubble I used data from the US census bureau, the local MLS, Newsweek magazine, US department o labor, and a variety of websites which used official government data sources. Basically, if you want to challenge the accuracy of the data presented in the analysis, you could go the source and verify it. I don’t have any problems with the accuracy of the data presented in the Gary Watts report, so he makes it past the first hurdle.

Direct Causation

Once you have accurate data, the analysis of this data must focus on cause and effect. There must be direct causation linking a specific set of conditions to the outcomes these conditions will produce. A good analysis demonstrates this direct causal link in a clear and unambiguous manner. When an analysis relies on indirect causation, it is weak; when an analysis relies on implied causation, it is worthless.

In The Anatomy of a Credit Bubble, I demonstrated a number of direct causal links which impact how much people pay for houses:

  • House prices are directly correlated with amounts borrowed.
  • Amounts borrowed are directly correlated with the interest rate offered.
  • Amounts borrowed are directly correlated with the borrowers debt-to-income ratio.
  • Artificially low interest rates (reset issue) and exotic financing cause foreclosures.
  • Foreclosures cause higher interest rates.
  • Foreclosures above a certain threshold cause house prices to decline.
  • Declining house prices causes more foreclosures. (note the causally related downward spiral)
  • Declining house prices and increasing foreclosures cause lenders to lower debt-to-income ratios and raise interest rates.
  • Lower debt-to-income ratios and rising interest rates cause amounts borrowed to decline.
  • Less amounts borrowed (in conjunction with foreclosures) causes house prices to decline.

Notice the focus is always on correlation and causation forming a chain of events leading to an inevitable conclusion. A good analysis centers the debate around the premises. If the premises are true and accurate, the conclusions cannot be denied.

In contrast, a bad analysis states a conclusion and offers support through indirect or implied causation. When you read through the Gary Watts Real Estate Outlook 2007 you find yourself asking, “How does that impact house prices?” It is a question that is never answered.

Straw Man Arguments

You know an analysis is in trouble when it starts with straw-man arguments to refute counter claims. The Gary Watts Real Estate Outlook 2007 starts its analysis with this headline,

“So Why Do You Feel So Bad? . . . Could It Be The Media? Remember all the fuss over Y2K? How about Killer Bees, West Nile Virus and the Mad Cow disease? What happened with 2005’s “serious” lack of vaccines for one of the “worst” flu seasons? Where did SARS and the Bird Flu. . . fly to?”

He left out crop circles, UFOs, Kennedy conspiracy theories, and the prophesies of Nostradamus. This is an effort to make all dissenters look like raving maniacs with no credibility. The implication is that people who believe there is a housing bubble must also have believed in these other erroneous predictions. This is a feeble attempt to increase his own credibility through linking his opponents to false predictions.

Gary Watts Real Estate Analysis

When he finally gets to real estate, he pulls out these gems:

“Housing Prices Continue to Decline!

Only the rate of appreciation is declining; home prices are still rising. The median profit earned for Orange County was $291,000 for 4 years of ownership!”

Here he conflates a rising median with rising prices for individual homes. We all know the prices of individual properties are declining. We have documented it in many, many posts. The median holds up only because sales at the bottom of the market are nearly zero and incentives and discounts are not reflected in the reported sales prices. The comment about the median profit is completely superfluous information which only documents that we had a bubble. It makes no statement as to whether house prices are currently rising or falling.

Next Mr. Watts comments on the decline in sales:

“Home Sales Decline By ____30___%!

They are measuring against 2005’s almost record year. Since 1996, the yearly average of all sales in Orange County has been 42,716. Last year our sales decline will be only 15% off our 10 year average.”

Sales are below the 10 year average, but only by 15%. Notice the attempt to make this seem insignificant? Bear markets in real estate begin with a dramatic drop in sales. This is the leading indicator everyone anticipates. He makes no mention of what this means. A good argument would have at least attempted to address the bearish argument of declining sales signaling the top of the market.

More nonsense, this time on foreclosures:

“Foreclosure Activity Rises!

They have to be up after hitting a record low! The truth is that 99% of all loans in the U.S. are not in foreclosure. The remaining 1% that were foreclosed upon had the following breakdown:

* 80% were classified by federal lenders as Professional Thieves and were turned over to the FBI.

* 20% were classified by lenders as Fraud for Property that resulted in unethical lending practices.

* Ca. Defaults: Historical 32,762 – Low: 12,145- 3Q’04 High: 59,987 – 1Q’96 Current: 37,273

* For all of ‘06, foreclosures accounted for only 1.81% of all Orange County sales, with lenders reselling those homes at an average discount of only 3.8%!”

Here he tries to make it sound as if borrowers are making their payments, and the foreclosure problem has nothing to do with the exotic loan terms. According to Gary Watts breakdown 100% of the foreclosures can be attributed to theft or fraud. Does anyone believe that? Somebody provide me a link to his supporting material concerning the breakdown of foreclosures — if it exists. I would like to see it. I suspect this is a rectal extraction. Plus, he completely ignores the implications of the trend in foreclosures which is increasing at an increasing rate. It isn’t the number of foreclosures today that is the problem, it is the number forecast for the next 5 to 7 years that is alarming.

Then Mr. Watts really pulls out all the stops,

“Affordability Index at Record Low – So Few Can Afford to Buy! Home ownership is at a record high of 70%, while the baby boomers ownership percentage is 80%! This index is archaic and does not account for how dramatically the world changed in 1979.”

Affordability is the central issue of the bubble. His drawn out attempt to make light of this problem is ridiculous. First, what does his statement about ownership percentages have to do with anything? Affordability is so low because this increase in home ownership (caused by loose lending standards) has driven up prices as buyers outbid one another for properties.

He tries to bridge to his analysis about the changing world in 1979… Basically, he says baby boomers are rich, and they will buy so much real estate that the market demand is limitless. This is silly. Baby boomers were big participants in the bubble, that is clear; however, now that these second homes are burning a financial hole in their pockets, they are not buying more, but instead selling what they have. Also, baby boomers are all moving toward the empty nest stage and into retirement. Their demand for housing space is going to decline as they downsize and abandon their McMansions.

Plus, I just have to wonder why this market altering event in 1979 didn’t prevent the last bear market from 1990 to 1996 — a bear market Gary Watts accurately predicted?



I don’t want to rehash his entire analysis, but when you read it you see numerous examples of indirect or implied causation. Each of the facts he mentions could in some way contribute to increased buying or decreased supply, but each of them also could amount to nothing. It is the shotgun approach: maybe one or two items out of the list of 20 will have an impact, so he just lists them all hoping the cumulative impact will convince the reader prices will increase. He plays on the inability of most people to sort through the details. He doesn’t dazzle them with brilliance, he baffles them with BS.

Give yourself an out

In the final paragraph, Gary Watts does give himself an out which makes the inaccuracies of his forecast look beyond his control.

“What to Watch:

1. If the Fed sees things it does not like and raises interest rates.

2. If increases in our housing inventory push the supply past 5.5 months.

3. Un-motivated sellers still entering the market in large numbers.”

This is an obvious tactic as explained by Rich Toscano,

“This is the type of permabull revisionism that we can expect a lot more of in the months and years ahead. It goes something like this: “We were right to predict infinitely rising home prices, but who could have foreseen Factor X?” Factor X might be further mortgage defaults, employment weakness, a consumer slowdown, outmigration, or any number of other problems. It will be discussed as if it was some entirely unpredictable exogenous shock, and that the bullish analysts’ predictions would have been spot on had the X-Factor not come into play. The truth is that the X-Factor will not be some external shock as they’d have us believe, but a likely if not inevitable result of the excesses of the housing bubble.”

At the time Gary Watts wrote his analysis, there was more than 5.5 months of inventory on the market. It has only gotten worse. He built in the excuse for the failure of his analysis.


A good analysis uses direct causation with verifiable data, clear premises and easy to understand conclusions. A bad analysis has faulty data and utilizes indirect or implied causation to support a hazy conclusion.

People in the industry who really want a market analysis employ companies like John Burns Consulting to get something with real predictive power. Nobody who makes multi-million dollar investment decisions uses Gary Watts. Quite honestly, if a consultant I used gave me a report like Gary’s, I probably wouldn’t pay them, and I certainly wouldn’t use them again.

Gary Watts analysis is nothing to take very seriously, but it doesn’t need to be. Gary’s place in the REIC is not that of a paid analyst, he is a paid shill of local realtors. His analysis is not intended to actually forecast anything, he merely needs to make it plausible enough to help realtors convince people to buy homes. If you want to rely on him to guide you for making the purchase of a home, do so at your own risk and with the full knowledge you are a sheeple being guided to the slaughterhouse.

41 thoughts on “Telling Good Analysis from Bad

  1. awgee

    How timely. It had been occuring to me after reading some of the posts that some think that just because someone has an opinion, that that particular opinion is just as valid as another opinion. There is a huge difference between and opinion and a vote.

  2. Jason

    Excellent as always, IrvineRenter! The Watts drivel reminds me of the idea that the more exclamation points in a real estate listing, the more they’re covering up for lack of real features/legitimate good points. The excerpts from Watts have exclamation points all over the place. Maybe in this case, it’s the more exclamation points, the more B.S. he’s spewing. Keep up the great work.

  3. SoCalwatcher

    Interesting post. I love it when these pundits are ripped to shreds when people who can see through the BS make the effort to shine the light on the cockroach.

    I still have no idea how any logical and rational person could honestly believe that home prices were never going to stop. It does not take a Econ genius to firugre out that many factors must be in balance for a market to work. When the market boils over with few reasons that violate these balances, markets plummet.

    Guys like Watts, Kiyosaki, Sheets, etc. make money by telling people what they want to hear. “You catch more flies with a drop of honey than a gallon of gall.” said Abe Lincoln. In this case, rational facts and analysis are the “gall”.

    I think IHB needs one more post badge : The Tulip Award

  4. biscuitninja

    Wow! its nice to know there are people still swilling from the cool-aid tap. You know when the market FINALLY comes back up, they will say, “this is what I have been telling you for years”! It never ceases to amaze me.

  5. lee in irvine

    I’ve listened to Gary speak and he honestly believes the nonsense he spews. He tries to simplify his analysis and bring it to his cheering section in layman’s terms. He rarely uses common real estate jargon in his speeches because he realizes that half the audience is very new to the business, and many of them have very little financial sophistication. As Irvine Renter points out, Gary Watts loves to use commonly accepted misconceptions in his arguments.

    Gary Watts is living proof that the entire RE industry must change and fall under more scrutiny from the regulators in the future. A self regulating group with oversight from the government would work much better than the existing loose canon approach. The days of the GED (wannabe grad), parlaying a new career in RE, so he/she can give financial/investment advice is just ludicrous. It must change.

  6. Ranger Rick

    Just the facts mam. Great rational analysis as always. If I was an employer, I would hire you in a second. I can’t tell you how refreshing it is to read an “opinion” that has been carefully thought out.

    I have so many friends that are so deeply invested in RE and plan on selling their investment properties in 2 years for their gains. I keep telling them that there may be no gains in 2 years…. and they look at me like I am a two head alien.

    Keep up the fantastic work!

  7. Watching...

    Outstanding report. I am also in the business of analyzing. I wish I could write as well you do. Your article was clear, easy to read and well written. Keep it up!!!!!!!!!!

  8. Truth Seeker

    First it’s why we’re due for a real estate crash.

    Then it’s why my analysis that we’re due for a real estate crash is better than the other guy’s analysis that we’re not due for a real estate crash.

    What’s next, why my analysis of my analysis that we’re due for a real estate crash is better than the other guy’s analysis of his analysis that we’re not due for a real estate crash?

    I’m not a Gary Watts fan, but I do think your post is silly.

  9. No_Such_Reality

    Perhaps we should re-title it.? How about “How to tell when your RE Agent and the pundits are blowing sunshine up your backside.”

  10. Major Schadenfreude

    Another classic to add to the IHB canon!

    “…a rectal extraction” – LOL Hillarious!

  11. Major Schadenfreude

    The post is not silly.

    There is a lot of mis-information about the RE market in the media. Today’s post is a good guide on how to see through the BS. It will help people be better “seekers of the truth”.

    He used his Credit Bubble analysis as an example of good analysis because it is one!

  12. graphrix

    It looks like Gary forgot one of his better outs in his report of an increase in foreclosure activity. Back in December of 2005 Gary had this to say: Anyone waiting for a major spike in foreclosures to buy a discounted home should forget it, said broker Watts. “They’re not going to see it,” he said.

    Well it wasn’t so bad in 2006 with 647 foreclosures but I would say that 2007 is seeing a major spike with 1031 and it is only May. I think if the amount is more than double in half the time it might be considered a major spike for Gary. We will know next month won’t we.

  13. oc-conservative

    Gary Watts made money in the previous real estate cycles, but has been clearly wrong on the end of this one.

    Why is he anything special that’s what I want to know?

    And, Gary, why do you need to use so much bold and exclamation points in your fucking report? That alone makes me want to punch you in the face when I read your “report” and I’m a pretty peaceful person.

  14. Bryce Beattie

    Great post. I believe the ability to make a good analysis is probably the most important skill to pick up in any field of investment.

  15. NickStone

    Irvine Renter:

    You would have made a good scientist. Perhaps you missed your calling.


    What bothers me about the permabulls is that NAR was ill advised to link their reputation to market predictions in the first place. Realtors are supposed to be about the competent conveyance of Real Estate… nothing more. They should have absolutely nothing to do with predicting market trends. That is why ALL Comparative Market Analyses and Appraisals HAVE DATES ON THEM…. so that all opinions of value cannot be perceived as a market trend analysis.

    This whole bubble bursting mess is going to be a major pie in the face for NAR and it absolutely did not have to be.

  16. oc-conservative

    Was any one around during the early 90’s that can tell us how low prices got relative to peak prices?

    You just can’t tell from the median data because it is so skewed. A few real life examples would be useful.

  17. awgee

    I bought in a SFR in the California Heights area of Long Beach for $250,000. I had it reassessed for tax purposes at $178,000 and I think I may have hard pressed to get that by 1995. -29% and I was upside down on my mortgage.

  18. MMG

    “Gary Watts made money in the previous real estate cycles, but has been clearly wrong on the end of this one.”

    I wonder why he is so stubborn this time, he would appear alot smarter if he would have called it 2005,2006 or even 2007 yet he is very stubborn when only a moron can ignore the decline?

  19. socalhousingbubble

    One of the classic lines I remember from seeing Gary debate Chris Thornberg (in person) was his reasoning for the oft-cited demographic shift contribution to upward price movement.

    He stated that the baby boomers, flush with cash in the midst of their peak earning years, “enjoy investing in real estate” [including vacation properties and homes for kids in college] and would continue to do so, implying that a paradigm shift had occurred.

    At the end of the debate during Q&A, I was actually in line to ask him if the only reason they were “enjoying” this investing is that it had created insane, stock-market-smashing returns over the last few years, but they did not get to my question.

    The guy is an idiot, and the crediblity he was given for predicting the last downturn has been completely overspent in this latest cycle.


  20. nirvinerealtor

    I bought my house in 1994 in Laguna Hills for $300K, in 1995, it was appraised at $240K (-20%). Today it has a market value of $1M – $1.1M.

  21. NanoWest


    So you won’t be surprised when it is worth about $450K – $500K in 2010. The 20% drop you saw in 1994 will be small compared to the correction we are just entering.

  22. NanoWest

    OK here is my story…..I was a young 30 year old pup in 1988 and I bought a house and it doubled in value…I figured I was a genius…….so I got another house, paid 480K and put 200K in upgrades. B of A appraised the house in 1990 for $750K. I had to sell for a move and put the house on a market for $725K thinking it would be an easy sale.

    Well, 18 months later I sold it for $480K and had to take back a 10% second. I felt like somone pulled out my stomach from the inside out…it was miserable.

    I purchased a home in silly valley for 400K, lowest amount I could pay and not have capital gains…’s the good part. Soom fool purchased the house in silly valley for 1 million in 2000 and I paid cash for a home in Irvine in 2001(600k) Sold the irvine house due to divorce in 2005 for 1.1 million……

    I am out of real estate now, I use the interest from my sale to pay for my apartment…and I believe condos will be about $220 per sq ft by 2010. I won’t buy in Irvine though, because I find it a littl on the boring side.

  23. graphrix

    SoCalwatcher – I think you mght be right this way the Kool-aid is constantly regergitated.

  24. graphrix

    Sue – I second IrvineRenter’s thought as you do post great articles. Keep them coming and we would love to see you in the forums.

  25. oc-conservative


    Don’t be so smug. Your predictions are no better than Gary Watts.

    Thanks, Nirvinerealtor, for providing your example.

  26. NanoWest


    I would suggest that my views are similar to Gary Watts, but on the downside…..and thats OK. Like everyone, I can only guess at what will happen.

    At this point though, I believe that prices will correct such that the average home costs about 5 times the average income or about $350,000. This is a premium above the rest of the country and pretty much in line with history…..of course I could spout off all the bear stories……..just like the bulls can give you all the reasons(land, OC special….)

    Guess we will wait and see……

  27. nirvinerealtor


    We are roughly in the same age range, you are a bit older though.
    I started buying real estate in the mid 1980 so I can relate to your experience. I did not think I was a genius, I thought luck was everthing.

    You sound like you are unmarried, I can see living in Irvine is a bit on the boring side. Go and live by the beach and I bet you will feel good.

    Buying a home is all about psychology. Case in point. In 1989, people would pay anything for a house. In 1995, people would not even take a house for free.

  28. No_Such_Reality

    nirinverealtor, your 1994 to present experience is a good highlight. Overall, when homes are bought near their fundamentals (price to rent/income etc.) and the owner has the financial wherewithal to hold the property and its sundry costs, over the long term, the tend to be good hedges of value providing a service the owners need.

    Overall, has your situation indicates, the market when it’s not positive can be very negative handing someone a paper loss of 20% or more in a single year. If you can afford the long term hold, you’re good, if you can’t, you’re in a real pinch.

    I would estimate that if you picked it up in 1994, it would have been valued higher in 1991-1993 (if it wasn’t new), maybe only a little, maybe a lot. But the key, IMHO, when buying residential property is you need to be able to hold ten years.

    In this market, if you buy anything, you need to be happy with the place. It may come back and be worth more, but that likely take more than five or seven years to occur.

  29. Rational Man

    I was stunned by IrvineRenter’s clear, rational, and compelling case against Gary’s shoddy analysis. It inspired me with the hope that rational thought trumps BS. Then I read your post and discovered that irrational people like you still don’t get it or accept it. I can only assume that the reality of the obvious housing bubble is too painful for you to bear. Could this be motivating your denial of the housing bubble by refusing to accept that anyone can ever know anything about the housing market through rational thought and considered evidence? Very sad.

  30. Rational Man

    Have you considered selling now to lock in your profits? The Case-Shiller Home Price Index will show exactly how overpriced property is in your area. It will show how much air must come out of the housing bubble before house prices are in line with historical trends. Before forewared, the data will make you sad.

  31. NanoWest

    Yes,,,,,,,and in about 5 years we will be back to the point where real estate is considered the worst possible investment in the world…and prices will be reasonable…..and we will start the cycle again.

    As for the beach…I have a boat in Long Beach…….I spend about half my evenings on the boat….name of the boat….NanoWest.

  32. Ann

    Another real life story, from the Bay Area:

    Purchased new 3 bedroom townhouse in a small development in Fremont, CA in 1990 for $225,000. A few months prior, same home was going for $260,000.

    Within 2 years, one individual sold at $175,000. Everyone in complex was completely shocked.

    But what followed from 1992 through 1997: 1/3 of townhomes in development sold for $180,000. Peak-to-trough 30% decline.

    2005/2006 sales prices in this development? $585,000!

    (We sold for a $50K profit after renting townhouse out for a few years, but wish we kept it just a couple years longer…)

  33. JimAtLaw

    Ah, but they were lured in by the ever-increasing commission check. The conflict of interest is plain – the size of realtor commissions increases with a rising market, and as went the boom, so went the commission checks. They were only too happy to exclaim that real estate never goes down, and buy now or be priced out forever, because each person who bought it, so to speak, was lining the pockets of the agent. They are hardly the first to trade long term credibility for a few extra dollars, and frankly, many of our population will not remember the lies a few years from now – realtors will be exclaiming that that they were saying homes were overpriced and due for a crash long before it happened, and people will buy it again – hook, line and sinker.

  34. TheRealist

    Just found your little place on the web here, IrvineRenter. How I missed it I have no idea, and I’ve been to probably half the blogs listed in your links. (Finally found it thanks to a reference in Slate of all places:

    “The Real Morons of Orange County—-Why America’s most reckless real estate investors come from Irvine, Calif.”

    Ahh well. Glad I found you. I see you receive most of your comments within the first few days of your posting. Nevertheless, let me provide a quick update.

    Gary Watts just came out with his long-awaited “Mid-Year Update”. Under “What to Watch” (i.e. his caveats/outs)—

    1. If the Fed sees things it does not like and raises interest rates.

    2. If increases in our housing inventory push the supply past 8 months.

    3. Un-motivated sellers still entering the market in large numbers.

    The only change from his PREVIOUS outlook? SUPPLY IS NOW 8 MONTHS INSTEAD OF 5 1/2 IN THE LAST REPORT!!!!!!!!

    It must be wonderful to simply align and adjust your forecasts to a series of moving targets and still be regarded as “credible”.

    What an utter clown.

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