CME Housing Futures Show More Price Depreciation Expected

As many of you know by now, CME offers housing futures for investors to take a position in. The contracts trade off of the S&P/Case-Shiller Home Price Index that tracks single-family home prices in a number of cities. The most recent actual home-price data released by S&P/Case-Shiller in from January 2007. Below we compare the difference between the CME housing contracts that expire in February 2008 to the actual January 2007 prices to see what the futures are forecasting for home prices.

Based on the January prices, the Chicago market is expected to fall the least by 3.3%. Boston is expected to fall the most at -6.2%. The Composite Index of all markets is expected to fall 5.6%, indicating investors believe a bottom will still not be in place by February of next year.

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We have been tracking the housing futures for some time now, and below we look at how accurate they were based on our initial data points. We first started tracking the housing futures in July 2006. Below we highlight where the November 2006 contracts were trading in July along with the actual November 2006 numbers that were released earlier this year (there is usually a 3 month lag in the release of the actual reports).

In general, the contracts seemed to do a pretty good job of forecasting future housing prices five months out. Miami, Boston, San Diego and Washington DC did, however, have a pretty wide discrepancy. Miami was forecast to fall much more than it actually did, while Boston, San Diego and DC were all expected to fall much less than they actually did.

Comments

[Quaker:]

I'm not sure just how you guage these kinds of things. When houses are falling, do buyers get a bigger house for discounted dollars? Do sellers have to spend more to make a house sellable?

It seems to me that the median price of a house is up but the median size of a house is up just as well.

2007 Apr 16 07:52 PM

[Johnny Bitc...:]

There are a number of problems with this data, which makes it somewhat of a fool's gamble to bet on:

1. lack of comparability in size and quality of the sold inventory mix

2. lack of reporting on kickbacks to buyers

3. use of appraisal data on refi's included in the data......causes upward bias in price as the use of the appraisal is just to ballpark the permissable loan

And, of course, how do you figure out when sellers are going to get realistic ?

Anybody with common sense can understand that a massive increase in inventory is really just a pending price fall.....................

People go crazy in masses, but return to their senses one by one......

And one by one, sellers are going to return to their senses.........when enough are realistic we'll be at a bottom.......

For now.....inventory increase equals pending price fall !

regards,

john.

2007 Apr 17 01:04 AM