The Roof Is Caving In On the Housing Market

The housing data don't lie: the sky is falling, and the roof is caving in too.

Earlier this week, the Chicago Mercantile Exchange (CME) extended the futures market on the S&P Case-Shiller Home Prices Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011.

For all of you who think a 15-25% pullback in the real estate market can't happen, I suggest you take a look at the CME pricing Web site.

The market is new and illiquid, so price discovery may be imperfect. But futures traders are putting real money on a major pullback in real estate prices. The table below shows the estimated percentage change in real estate prices in 10 cities based on the most recent futures sale on the CME. The data starts with the November 2007 contract and runs annually through November 2011.

click to enlarge

Read that chart carefully. Over the next 12 months, traders expect prices to fall in each of these cities by 5-13%. By November 2009, prices will be down more than 10 percent in every city save Chicago. By November 2010, prices will be down 20% in Miami and San Francisco, and 15%+ in San Diego, Las Vegas and Washington, D.C. It gets worse in 2011.

As a point of emphasis, remember that these are priced in actual dollars and do not take into account inflation. Factor in 3% annual inflation and the real value of these homes falls a further 11.5% by 2011, putting prices in Miami and San Francisco down 37% and 36% respectively on a real-dollar basis. Who said house prices never fall...

Could these numbers be wrong? Of course. This futures market is very thin, and even in liquid markets, traders bet wrong all the time. But anyone who disagrees with these numbers can go trade against them today at the CME, with real dollars.

It's hard to imagine where this leaves us. If prices in major housing markets really do fall 25%, the subprime "disaster" we've seen to date will look quaint. Currently, house prices are down about 4% from their peak and the economy is strong; yet, we've already seen major problems. If recession hits AND home prices fall 25%, it's going to get really ugly.

The latest S&P/Case-Shiller Home Price Index report comes out today, and it bears watching. The report will cover data through July 2007, and will be the first report to include data from sales that took place after the credit crisis hit. Those sales will be blended in with sales from May and June, so we won't feel the full effect, but we may see some initial fallout from the credit crisis in those numbers.

There you have it — my doom and gloom report. I'll be back to my usual cheery self tomorrow...

Written by Matthew Hougan

Comments

[elwind45]

I find it interesting that the wall street types are pinning hopes on the de part and not the in part of flation. Inflation would kill the beloved stock market. Deflation would kill economy but lead to lower interest rates. the turning of the greed wheel is very much alive and hell.

[oldguy]

elwind, if you have any money, do yourself a favor and get someone else to invest it for you.

[oldguy]

elwind, if you have nay money, do yourself a favor and find someone else to invest it for you. in the market, money talks and political attitudes walk.