By Matthew Hougan
I spent some time looking at the Chicago Mercantile Exchange's housing futures this week. The futures are tied to the S&P Case-Shiller Home Price Indexes, and are the only liquid way to bet on where house prices are heading.
Right now, the futures all agree: home prices are going lower.
The longest-dated contract available expires November 2012. Using that contract, I looked at the most recent sale to see where the market thinks home prices will be in four years. The data compare November 2012 vs. August 2008, because August 2008 is the last date for which we have index data available.
Predicted House Price Changes,
August 2008 vs. Nov. 2012 |
City | Price Change |
Boston | -10.29% |
Chicago | 0.00% |
Denver | -12.55% |
Las Vegas | -12.97% |
Los Angeles | -17.22% |
Miami | -11.93% |
New York | -13.40% |
San Diego | -13.21% |
San Francisco | -12.57% |
Washington, D.C. | -15.32% |
Composite | -10.38% |
Based on CME House Price Futures, as of Nov. 19, 2008. |
Those numbers don't look too bad, until you realize a few things.
First, remember that most people buy their homes on margin. Suppose you're considering buying a $300,000 home in Los Angeles. You've put $60,000 down. Four years from now, you expect the home's value to decline $51,660 (17.22% of $300K). If the home price futures are right, you will lose 86% of your down payment.
No wonder homes aren't selling.
The second thing to understand is that home prices are already down big in all of these markets. The table below shows how far prices are down off their all-time highs today, and how much further they'll decline by November 2012 if the futures markets are right.
Real And Predicated House Price Changes
Peak-to-Trough,
Nov. 2008 and Nov. 2012 |
City | Actual % Change From High Through 11/08 | Predicted % Change From High Through 11/12 |
Boston | -9.10% | -18.45% |
Chicago | -11.31% | -11.31% |
Denver | -5.44% | -17.31% |
Las Vegas | -35.89% | -44.20% |
Los Angeles | -30.94% | -42.83% |
Miami | -34.67% | -42.46% |
New York | -10.65% | -22.62% |
San Diego | -32.60% | -41.51% |
San Francisco | -30.67% | -39.64% |
Washington, D.C. | -22.39% | -34.28% |
Composite | -21.96% | -29.29% |
Based on CME House Price Futures, as of Nov. 19, 2008. |
Those numbers are scary.
National home prices down 29%? It was just a few years ago when people said we would never have a nationwide home price.
And here's the thing people aren't remembering: These are real dollar prices, not inflation-adjusted values. National home prices hit their peak in September 2006, and based on the CPI, inflation has risen about 5% since then. Build that into the calculator, and national home prices are actually down about 25.67% from their peak.
It's worse if you carry it forward. Consumer inflation is running about 5% per year right now. If you run that through November 2012, national home prices will be down about 44.44% from their peak on a real-dollar basis. Las Vegas home prices will be down 56.19%.
Those are simply incredible figures.
The home price futures are thinly traded, so price discovery might not be perfect. There could be an opportunity here for someone to take the other side of the trade and bet that home prices will stabilize or even rise a little between now and 2012.
Any takers?
This article has 7 comments:
On the other hand, it is possible to put a floor to existing home prices if the Federal Government, with Fed backing, offers a buy-back at the market price frozen at some point in time(a snapshot, so to speak, say in November 2008). The cost appears to be unmanageable because of the sheer size of the market. But if the offer is limited to homes below the national median price or the median price for each regional market, the cost would be manageable. Because the government can rent out any acquired properties, there will be a sizeable cash flow too. The important thing to note is that this will immediately change the market psychology. Buyers will emerge, while some owners will withdraw their homes from the market. This will effectively stop the the further bleeding of financials.
Some may object that this would imply the Fed creating a large quantity of money and would be inflationary. I argue that inflation is predicated on excessive aggregate demand. The money created is not for anyone to chase after scarce goods, but only to withdraw some excess housing stock from the market. It will put a floor to the lower half of the housing market while allowing more expensive homes to find their equilibrium price levels given this limited intervention. The government is not actively buying, only acquiring homes from existing owners who need to sell.
The biggest lie sold to Americans was that Home OWNERSHIP was a desired thing. But in FACT, if the bank holds a mortage on your house, you are NOT a homeowner and in FACT are RENTING- but from the bank and paying more for the "privilege". Stupid is as stupid does. And now our "smart" government wants to cure the problem of too much easy money, with what? More easy money, lol. Fools we are, I tell ya, fools. God bless America? Maybe not. But a fool and his money are soon parted.