Housing Prices Projected to Fall Through End of Decade

From the CME Housing futures below, we highlight the expectations for median home prices in the ten cities that are traded. These contracts trade off of the S&P/Case-Shiller Home Price indices that we highlighted yesterday.

We took the prices of the forward contracts going out to November 2011 and tacked them onto the historical Case-Shiller data to paint a picture of what investors are expecting for home prices over the next few years. The blue lines below are actual home price data and the red lines are the prices of the futures. For each city, we highlight the percentage drop from the most recent home price data to the lowest priced futures contract.

As shown, home prices are expected to drop sharply from current levels, with San Francisco and Miami taking it the hardest. Chicago is expected to hold up the best, with expectations of only an 8% drop by 2010. The composite index of all ten cities is expected to fall another 13% from now to May 2010 and then finally stabilize. Based on where traders are putting their money, a bottom doesn't seem to be in store until the start of the next decade.

click to enlarge

Comments

[(Dis)stress...:]

What discount rate/cost of capital did you apply? It's been a while, but I don't think you're interpreting the futures prices correctly, double check by someone who trades futures would be appreciated.

If you believe that the index a year from now should be $104.50, the future would trade at $100 today (to account for the opportunity cost of capital, here just using the 4.5% fed funds rate).

So you need to inflate TODAYs price for the future by the remaining duration. San Fran is the worst market, shown as -26% by your analysis. The Nov-11 future is trading at 154.60 now, so the current market expectation is that the future is will trade at $154.6 * (1.045^3) = $176.4, -15% (not -26%).

Still negative in most cases, but not as bad as you portray. Of course even a flat market in nominal prices is painful.

2007 Nov 01 04:52 PM

[Steven R. S...:]

The run up in pricing could not have happened without the help of Appraisers willing to fudge values 5-25% per deal to help make the deals work. In the end, the losses will be recovered on the insurance policies of appraisers who worked for a fraction of what a real appraisal should cost.

2007 Nov 01 04:57 PM

[Steven R. S...:]

The run up in pricing could not have happened without the help of Appraisers willing to fudge values 5-25% per deal to help make the deals work. In the end, the losses will be recovered on the insurance policies of appraisers who worked for a fraction of what a real appraisal should cost.

2007 Nov 01 04:57 PM

[Steven R. S...:]

The run up in pricing could not have happened without the help of Appraisers willing to fudge values 5-25% per deal to help make the deals work. In the end, the losses will be recovered on the insurance policies of appraisers who worked for a fraction of what a real appraisal should cost.

2007 Nov 01 04:59 PM

[(Dis)stress...:]

What discount rate/cost of capital did you apply? It's been a while, but I don't think you're interpreting the futures prices correctly, double check by someone who trades futures would be appreciated.

If you believe that the index a year from now should be $104.50, the future would trade at $100 today (to account for the opportunity cost of capital, here just using the 4.5% fed funds rate).

So you need to inflate TODAYs price for the future by the remaining duration. San Fran is the worst market, shown as -26% by your analysis. The Nov-11 future is trading at 154.60 now, so the current market expectation is that the future is will trade at $154.6 * (1.045^3) = $176.4, -15% (not -26%).

Still negative in most cases, but not as bad as you portray. Of course even a flat market is below the everyman's expectations.

2007 Nov 01 05:27 PM

[(Dis)stress...:]

Make that 154.6 * (1.045^4) = $184.4, -11% (not -26%).

2007 Nov 01 05:31 PM

[moom:]

Income on housing (rent/implicit rent) maybe also needs to be taken into account in actually determining what futures prices mean for house prices.

2007 Nov 01 09:58 PM

[Dirt Dog:]

Interesting. But in order to give the Case-Shilling index any predictive weight, it would have been helpful to know whether the C/S Index also predicted the heights. In other words, if in 2000, the C/S Index projected big increases from 2000-2006, that would be meaningful. How do we find this info?

2007 Nov 02 10:58 AM