Chicago Trader

Futures Show Home Prices Continuing To Plummet

Matthew Hougan is showing a comlete lack of understanding of futures contracts in this article. First, there is the obvious problem of the Case/Shiller home price index futures contracts being TOTALLY illiquid. Some of the contracts go months without seeing any volume whatsoever. More important, futures prices are not a function of the future price of the underlying (here the underlying is the Case/Shiller index). The difference between the underlying product and a futures contract, called the basis or roll, is simply a cost of carry function. You take the underlying product and multiply that by the constantly compounded interest rate, then subtract out any benefits to holding the underlying vs. the future. An example of a benefit to holding the underlying would be the dividend yield of carrying a basket of stocks vs holding the sp500 future (which does not pay a dividend). I do not trade the Case/Shiller home index, thus I can not tell you exactly what goes into the basis calculation for this product. However, I can tell you with 100% certainty, that the price of these futures contracts DOES NOT predict the future value of the housing market any better than the actual physical housing market. This oversight is a rookie mistake, plain and simple.

Housing Prices Are Still Headed Down

I realize that electronic sarcasm is hard to gauge, but I believe Expat is being facetious bull, rather than making a serious case for homes going up.

"Prices just have to decline another 35%.
Or maybe 40%.

But we are on the way, baby! Recovery city! Just one last dip and it's off we go! Wheeeeee!"

It's funny cause its true.