A Tale of Two Coasts

The CME has housing futures that track the S&P/Case-Shiller home price indices. These futures allow big investors to trade or hedge against real estate prices nationwide. Since last September, the Composite 10-City futures contract that expires in February 2009 has fallen 12.56%, meaning investors have gotten more bearish on the outlook for real estate prices early next year.

There is a big discrepancy between the outlook for Los Angeles and New York, however. As shown, the February '09 contract for median home prices in Los Angeles has fallen nearly 28% over the last seven months, while the contract for New York has barely budged.

click to enlarge

The actual change in home prices from their peaks also shows that the West Coast is struggling much more than the Northeast. The Composite 10-City index has fallen 13.36% from its peak, while Los Angeles has fallen 18% and New York has fallen 7%. The current price of the February '09 Composite 10-City contract is forecasting that from current levels, prices will fall by as much as they already have from their peaks. The contracts for Los Angeles are suggesting another 23.35% decline from current levels, while New York is expected to fall just 5%.

Comments

[User 130076:]

No kidding, New York is one big scam Wall Street and Banks. The rest of the country pays!

2008 Apr 11 08:49 AM

[nukldrager:]

California was a nice place before ww2

2008 Apr 11 08:56 AM

[tylakewalker:]

So Los Angeles represents the entire west coast and New York represents the entire Northeast. Could you over generalize any more?

2008 Apr 11 08:57 AM

[mavericks:]

San Francisco is more of a comparison to NY than LA. In SF, prices have barely budged too. However, you look in other parts of the bay area, particularily the suburbs in the east bay, and its NOT good. LA being so spread out and suburban, its not a surprise home prices have come down and probably have further to go. California is still very over priced compared to say, an Oregon. This won't be over in until the last balloon is deflated, and that will be in SF.

2008 Apr 11 09:05 AM

[john haskell:]

NY is not a scam; it is just behind the rest of the country. Bear Stearns et al are helping the city to catch up, though.

2008 Apr 11 09:09 AM

[bowlmar:]

East coast supplies high paying jobs, while California has low paying jobs. Even Silicon Valley is outsourcing to Asia. Hard to see investment banking being outsourced, eh?

2008 Apr 11 10:11 AM

[Malkiel:]

It's a good point about why those cities should be proxies for their regions--we all know that the designation of metro areas by the census bureau and others is a patchwork of political, demographic, and even geologic factors that aren't consistent from place to place. I don't have any idea whether "New York" includes Northern New Jersey and Fairfield county, Connecticut; but "Los Angeles" almost certainly doesn't include just the incorporated city of Los Angeles. "Mavericks" above had a good point that San Francisco might be a better match with New York if we confine "New York" to the 5 boroughs; Dunno if that's feasible using standard census data.

I can tell you as a resident of the New England zone between metro New York and metro Boston that housing prices are within a comfortable range of affordability here, much lower than the metro zones, though not within the ideal range posited by mortgage calculators (think 3.5x income rather than 2.5x). That's still a lot better than outlying areas of metro LA or SF on the mirror side...

2008 Apr 11 10:12 AM

[Urbane Gori...:]

Jeez.... Read before you post....

LA is just a bell-weather... As is NY... All this article is saying is that comparatively, LA (and therefore most of California) is posed to get hurt more than NY(and therefore the East Coast...)..

I live in a small foothills town in California and own a rental in Sacramento. I've been involved with real-estate for a long time.. I don't know much about the East Coast, well.. except women there wear funny pointy-toed shoes and the guys wear odd-colored green ties with light blue shirts...Explain that to me! ;-) ... but I can tell you that we are due much more pain in California in general. Using LA and NY is not surprising... These areas are where the jobs are, the volume of housing... And particularly housing that has ramped up in recent years...And these areas should experience a greater impact. Don't you find it interesting that NY is expected to suffer less than LA... I do..What's even more interesting is that aside from these two opposites, the majority of the US is not expected to drop as significantly.

So what do you do with this info... (aside from posting inanities..) .. Obviously, reconsider buying property in these areas for awhile; If you intend to buy financials, insurance companies or even mutual funds.... Consider whether their book of business includes exposure in these areas...

Thx jegan ;-)

2008 Apr 11 10:24 AM

[gordon:]

Northeast always leads the West on upside, lags West on downside I think.It's getting worse here in San Diego, the Northeast will follow. Sellers still have not reduced prices, at least 1 mil homes listings expired or were pulled "until the market gets better" nationwide.

2008 Apr 11 10:34 AM

[SVRenter:]

Where does this graph come from? Periodically I come across analyses like this one that report the future home prices implied by the CS futures contracts, but I've been unable to find comprehensive data (future price predictions, all cities). I've tried THE GOOGLE, but this time she hates me.

thx, sean

2008 Apr 11 10:56 AM

[Still Renting:]

Last I checked, New York city is a city, not a coast.

How's Florida doing these days. ;)

2008 Apr 11 11:56 AM

[bowlmar:]

No jobs in Florida, and the income of the senior set depends on pension, SS, and investment returns. All the "real estate investors" hit Florida to scam feeble minded retirees.

2008 Apr 11 01:45 PM

[Rhett:]

Price reduction of homes in Florida is far from commensurate with increasing inventory. Prices are going to have to fall - a lot - before Florida inventory is reduced to reasonable market balance.

2008 Apr 11 04:19 PM

[Wisdom-Seeker:]

Not only is Florida on the East Coast, but last time I checked, Seattle on the West Coast was doing at least as well as New York.

Article should be retitled "tale of two cities", but oops, that was already taken 150 years ago.

Bigger question is, will New York really come out okay, or are they just going to be a late bloomer?

2008 Apr 11 06:50 PM

[bearfund:]

There are multiple trends of differing wavelength superimposed on one another in these charts. We have the bubble bursting with a wavelength of maybe 12 or 16 years, which is what everyone's focused on. But we also have an oscillation between urban and suburban/exurban living with perhaps a 120-130-year wavelength (1870/1940/2000). This helps to explain why real estate in cities such as New York, San Francisco, and Seattle is holding up better than that in sprawl areas like Los Angeles, Atlanta, and Las Vegas. People's tastes are changing in favour of urbanism and they are using the broad decline as an opportunity to improve their lifestyles at a discount, supporting prices in cities that offer walkability, high-density mixed-use buildings, more cultural opportunities, attractive architecture, and viable mass transit. Some of this is due to identifiable factors such as renewed interest in environmental quality, higher oil prices, and health concerns, but it's also being driven by intangible longwave cultural changes, just as the suburban explosion was in the postwar decades.

None of this demand shift has anything to do with the bursting of the bubble; it's been under way for a few years already, though the bubble may later be viewed as the last gasp of suburbanism in this cycle. But it does help to explain part of the variability in the severity of the bust. If you're looking for real estate or developer investments, look for beaten-up firms that do most of their business in city cores; just like the people buying that City flat at a small discount, this may be your opportunity to pick up good companies on the cheap. AVB has a good number of urban and pseudourban properties, but I'd look for someone with less exposure to suburbs. I wouldn't touch the guys who build the cookie cutters 40 miles out of town; most of them will end up in bankruptcy. The bust will be longer and deeper for them, and the recovery much slower and weaker than they expect. Likewise, in commercial real estate I'd be looking for smaller operators with downtown properties on the coasts and avoiding the suburban mall/strip-mall operators. Retailers like WMT will do well during the recession, but there's no assurance that nearby smaller retailers or their landlords will participate. And they will miss out on most of the recovery as more people abandon the suburbs and those who remain are able to shop elsewhere. The longer the recession, the more the longer-term trend will work against these companies when it finally ends.

2008 Apr 12 12:20 PM

[curious cat:]

hey bearfund, there are lots of new factors driving people back out of the city. sure, it costs more to commute, but people can now do their jobs at home and don't have to commute. others are making use of flextime to reduce the number of trips they have to make.


fuel prices are going to have an impact, until demand affects decisions. some will buy transportation that is cheaper to operate, like motorcycles, or electric, or hydrogen, hybrid, mass transit, etc.

the desire to escape the congestion of the city works against the effects of reducing costs. most people are willing to live in the inner city until they can afford to move away. of course, there are exceptions, like some people in nyc who have been brainwashed into believing they are the center of the universe, etc. by and large, though, the demand for freedom and autonomy, lower taxes, lower daily expenses, larger living spaces, will far outweigh the consideration of higher fuel costs.

if anything, your contentions might hold true for smaller cities with lower taxes and better services. that might mean cities in the south.

2008 Apr 13 12:22 PM

[ibrenticus:]

hey bearfund, i was fascinated by your explanation of the 120-130-year wavelength cycle... where can i learn more about this theory?

2008 Sep 27 03:48 PM