Is owning a home—one of the staples of the American Dream—becoming a nightmare?
According to data just released by Standard & Poor’s, the once-booming housing market now displays all the symptoms of a classic bear market. The S&P/Case-Shiller Home Price Index, released Tuesday, reports that the decline in home prices shows no signs of abating.
The Index’s February 2007 20 City Composite (a value-weighted average of 20 metro area housing indexes) and 10 City Composite are down 1.0 percent and 1.5 percent, respectively, over year-ago levels. The S&P/Case-Shiller Index, which is one of the best gauges of the housing market out there, hasn’t recorded monthly declines on this level in almost 15 years. Robert Shiller, who’s Chief Economist at MacroMarkets LLC, and one of the leading authorities on real estate in the country, said that month-to-month declines are also persisting, with 17 out of the 20 cities down from their levels in January. If the chart below was a roller coaster, riders would now be holding on for dear life.
The S&P/Case-Shiller Index breaks out its data by metro area, so we can see which cities’ housing markets are treading water, and which are under water. Some cities, like Miami, Charlotte and Dallas, have been alternating between modest monthly price gains and declines since this time last year. But other cities, like San Francisco and Boston, have gone nowhere but down, registering persistent monthly declines since last spring.
The misery in the housing sector is likely to worsen. Just this week, the National Association of Realtors reported that existing homes sales in March were down 11.3 percent from March 2006. The damage from the bursting housing bubble is definitely carrying over to the broader economy. The obvious victims are companies whose fortunes are directly tied to housing and housing credit. Homebuilders like Lennar and D.R. Horton have reported sharply lower results; sub-prime lenders like New Century have gone bankrupt. But there are less obvious victims as well. Ford, for example, tried to blame its poor results on declining sales of pickup trucks to contractors. A recent Wall Street Journal article claimed that the stocks of credit-rating agencies like Moody's have suffered in recent months because their operations have become too reliant on rating bonds backed by mortgages … and mortgages are drying up.
If you’ve bought a house in one of those bubbly urban markets and you’re suddenly fearful of losing a big chunk of your nest egg, what do you do? Well, it is possible to hedge your bets by trading housing market futures and options on the Chicago Mercantile Exchange (NASDAQ:CME). The CME has offered trading in U.S home prices since April 2006, and the contracts are based on the aforementioned S&P/Case-Shiller Home Price Index. Investors in the CME futures have been pessimistic recently. The January 2008 housing futures contract projects prices in 10 major U.S. cities to be down 5.1 percent from early 2007.