Thursday, November 20, 2008

Home Prices Will Plummet Further (At least, that's what the futures say)

(Index Universe) I spent some time looking at the Chicago Mercantile Exchange's housing futures this week. The futures are tied to the S&P Case-Shiller Home Price Indexes, and are the only liquid way to bet on where house prices are heading.

Right now, the futures all agree: home prices are going lower.

The longest-dated contract available expires November 2012. Using that contract, I looked at the most recent sale to see where the market thinks home prices will be in four years. The data compare November 2012 vs. August 2008, because August 2008 is the last date for which we have index data available.

Predicted House Price Changes,
August 2008 vs. Nov. 2012

City

Price Change

Boston

-10.29%

Chicago

0.00%

Denver

-12.55%

Las Vegas

-12.97%

Los Angeles

-17.22%

Miami

-11.93%

New York

-13.40%

San Diego

-13.21%

San Francisco

-12.57%

Washington, D.C.

-15.32%

Composite

-10.38%

Based on CME House Price Futures, as of Nov. 19, 2008.


Those numbers don't look too bad, until you realize a few things.

First, remember that most people buy their homes on margin. Suppose you're considering buying a $300,000 home in Los Angeles. You've put $60,000 down. Four years from now, you expect the home's value to decline $51,660 (17.22% of $300K). If the home price futures are right, you will lose 86% of your down payment.

No wonder homes aren't selling.

The second thing to understand is that home prices are already down big in all of these markets. The table below shows how far prices are down off their all-time highs today, and how much further they'll decline by November 2012 if the futures markets are right.

Real And Predicated House Price Changes
Peak-to-Trough,
Nov. 2008 and Nov. 2012

City

Actual % Change From High Through 11/08

Predicted % Change From High Through 11/12

Boston

-9.10%

-18.45%

Chicago

-11.31%

-11.31%

Denver

-5.44%

-17.31%

Las Vegas

-35.89%

-44.20%

Los Angeles

-30.94%

-42.83%

Miami

-34.67%

-42.46%

New York

-10.65%

-22.62%

San Diego

-32.60%

-41.51%

San Francisco

-30.67%

-39.64%

Washington, D.C.

-22.39%

-34.28%

Composite

-21.96%

-29.29%

Based on CME House Price Futures, as of Nov. 19, 2008.


Those numbers are scary.

National home prices down 29%? It was just a few years ago when people said we would never have a nationwide home price.

And here's the thing people aren't remembering: These are real dollar prices, not inflation-adjusted values. National home prices hit their peak in September 2006, and based on the CPI, inflation has risen about 5% since then. Build that into the calculator, and national home prices are actually down about 25.67% from their peak.

It's worse if you carry it forward. Consumer inflation is running about 5% per year right now. If you run that through November 2012, national home prices will be down about 44.44% from their peak on a real-dollar basis. Las Vegas home prices will be down 56.19%.

Those are simply incredible figures.

The home price futures are thinly traded, so price discovery might not be perfect. There could be an opportunity here for someone to take the other side of the trade and bet that home prices will stabilize or even rise a little between now and 2012.

Any takers?




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