Home Prices in 2014? Early MacroShares Trading Says Dead Flat from Here

By Matthew Hougan

Investors expect the average price of a home in the U.S. in August 2014 to be virtually identical to where prices are today.

We know that by looking at the new MacroShares Major Metro Housing Up (NYSE: UMM) and MacroShares Major Metro Housing Down (NYSE: DMM) products, which began trading on the New York Stock Exchange this morning. We covered the launch here.

As of 10:02 a.m. EDT this morning, UMM was trading for $20.13 per share and DMM was trading for $30.97 per share. So how does that translate into a flat market over the next five years?

Here’s how the math works:

The new products are designed to provide 300% and -300% of the return of the S&P/Case-Shiller Home Price 10 Index, the leading measure of national home prices. But they are not designed to track those changes on a day-to-day basis; rather, they are designed to track the total performance change from December 31, 2008, through August 31, 2014.

The net asset value of each product was $25 a share based on the December 31, 2008, reading of the index. At that time, the index level was 162.17.

With DMM trading for $30.97 a share, investors are anticipating a $5.97-per-share change in the NAV through August 31, 2014. That translates into a 23.9% increase in the value of DMM.

Remember, though, that the product offers triple leverage; that 23.9% increase in DMM reflects a fall of just 8.0% in the index. Using the 162.17 base, that means investors expect the index to hit 149.2 by August 2014.

That's interesting, because Standard & Poor’s just released the April 2009 data for the S&P/Case-Shiller Home Price Indices. Overall, the data showed a continued but moderating decline in national home prices. But from our perspective, the most interesting piece of information was the April 2009 reading of the S&P/Case-Shiller Home Price 10 Index: 150.34.

In other words, based on the early trading in UMM and DMM, investors expect home prices in August 2014 to be almost exactly where they were in April 2009. To put a needle on it, they expect prices to fall 0.76%.

That’s not to say home prices will be flat in the interim. The S&P report shows that homes lost value in April at an astonishing 18% year-over-year clip. That’s not going to arrest itself overnight. Most likely, investors expect home prices will dip further before staging a recovery as we approach the 2014 deadline.

I personally wonder if that’s not a little too sanguine. As I’ve said before, when bubbles burst, they tend to overreact on the downside just as they over-inflated on the upside. I don’t think we’ve seen that in home prices yet. And with the prospect for higher interest rates, it could be a while before we see housing recover.

Then again, a reading of 149.2 puts national home prices back where they were in June 2003. If that’s where we are in August 2014, it will mean 10 years of flat home prices for the U.S. Adjust even for nominal inflation, and “real” home prices will be down significantly.

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Comments

[Mad Hedge F...:]

You got it! There is so much inventory out there it is unbelievable, yet the relentless tide of foreclosures keeps dumping more properties on the market. The sickness has metastasized to commercial real estate which may be the next big shoe to fall. Look at the chart of the Case-Shiller Real Estate Price Index, which shows us back at 2003 price levels. If this were a stock, would you want to buy it? It is starting to take on the flavor of an all out capitulation. Only the 1990-1997 bottom looks safe. Stay away. Rent, don’t buy.

Jun 30 02:48 PM

[Cold Reality:]

If only this could be true.

Unfortunately, the prices have not yet reached the trendline. When they do, and probably overshoot by a substantial margin due to the other adverse factors in play, flat prices from the high of 2009 (today) would seem highly favorable.

We have to reach a flat spot on the chart before prices can remain flat.

Jun 30 07:19 PM

[Think-About-It:]

Are you factoring in the annual expenses of the ETP? They run a minimum of 1.25% per year for 5 years = 6.25% that must be covered to just break even. Plus the expenses may be higher than that...

Also, there is the time value of money. You need to discount expented money that is 5 years out back to today.

Nobody that bought DMM today at 31 is expecting to get 31 dollars returned to them five years from now. Add the risks of this new product and definite carring costs and the built-in expected decline must be more than you suggest.

Jul 01 01:39 AM

[Fighting Yoda:]

You will be lucky if home prices stay where they are now in years. With rising delinquencies and foreclosures - home prices will continue to fall for along time. Price recovery in a surplus supply market is inconceivable - so UMM/DMM investors maybe wrong - like all other investors.

Prime delinquencies have hit 2.9% - that is a startling number. Everyone was hoping the prime market will holdup better, so essentially there is no place to run or hide. Today's Cas-Shiller should not be misread as return of stability - .56% is still a big fall, troubled markets like Phoenix, Miami, Las Vegas - show accelarated declines.

Jul 01 01:43 AM

[IancoleTX:]

1. There is no way housing prices will be doing anything but dropping in the short term. Look at the chart.

2. I would expect volatility to be falling from here on out (i.e. decrease at a decreasing rate), which means we will probably see eventual decline in the value of these 3x ETFs. I am not 100% confident of this assumption, but it has been the case with similar securities.

If I were going to get involved with these funds (which I am not), I would be shorting UMM for a reasonably safe long-term investment with a good rate of return. Just my .02, good luck all.

Jul 01 03:05 PM