Tuesday, September 25, 2007

What the Future Holds in Store

Check this out over at the Seeking Alpha site.

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.


Blogger brazos605 said...

Great find. Extremely informative, and information I never would have located on my own. I'm sure I'm just one of many out here who very much appreciate your ongoing work on this blog.

Sep 25, 2007, 10:32:00 PM  
Blogger sf jack said...


San Francisco -24.2%

"We're number 2!"

"We're number 2!"

"We're number 2!"

(After Miami, at -25.6%)


And look at John Karevoll at DataQuick, actually doing some useful analysis back in the day (1996) on how much more affordable mortgages became throughout the early 1990's housing market downturn.


In the present cycle as compared to '90 to '95, given that Chairman Bernanke has shown a moneybags mentality (ZIRP, anyone?), perhaps with rates going down along with greater house price drops (bigger bubble) - mortgages will see a great change than last time.

For Marin, traditional mortgages became 18.6% more affordable; in SF, 26.8% more affordable.

No adjustments for inflation, either.

Sep 26, 2007, 8:23:00 AM  
Blogger sf jack said...

"... a greater change than last time..."

Here's your tinyurl on Karevoll's data:


Sep 26, 2007, 8:27:00 AM  
Blogger marinite2 said...

"We're number 2!"

Yes, but we're #1 50% of the time

Sep 26, 2007, 9:49:00 AM  
Blogger Lisa said...

When the numbers become so undeniably grim, will the psychology start to do a 180....that "owning" a home with 0% equity isn't owning a home at all, and, in fact, it's a gigantic risk and is far worse than renting. That sucking your home dry of any equity defeats the point of owning a home. That homeownership is not worth it at ANY price, only a price that makes sense and that you can live with. That if you can't pay off your house in 15 years, you've bought too much house.

Even the BA news is getting grimmer by the day, so at some point, kool-aid won't do the trick anymore.

Sep 26, 2007, 3:41:00 PM  
Blogger Matthew said...

Interesting how the numbers show that some markets (Vegas, Chicago and NY for example) are predicted to bottom in 2010 or so and start increasing by 2011 while SF, Boston and a few others continue their declines through 2011.

I'd be curious to see the algorithm or model behind these forecasts. I'm sure part of it at least is based on when these markets started their downward trend.

Despite great frustrations, I will say that we live in very interesting times… at least that’s what I tell my kids (even as they roll their eyes at me). We housing bubble bloggers, I think, generally are more fiscally conservative, which has not been the American way over the past 10 or so years. I think, honestly, that is going to change. After we finish throwing up all the crap we’ve consumed and look ourselves squarely in the mirror, I doubt we’ll like much of what we see, so change will occur.

Along with the busting of this housing bubble and all the hell that it’s created, I foresee a pull back on consumption and new emphasis on education and savings in our future. Frankly, that time cannot come quick enough for me, but when the boomer generation starts hanging it up in droves and leaving the next few generations with 9+ trillion in national debt and runway global warming, I think we will se a major shift in consumer priorities and habits. Hell, given the crumbling dollar, I think those changes will be forced down our throats sooner than later.

Sep 26, 2007, 6:09:00 PM  
Blogger Matthew said...

I cannot help laughing when I read Realtor quotes about "this is the bottom so you better "jump" in soon".. blah, blah, blah..

Of course, their use of the term “jump” is a mixed metaphor if there ever was one.. We, of course, see it as a cliff and they see it as a rocket ship. We’ll just have to see who’s math and forecasts are correct.

I'll have to ask the obvious question then about the fuel for that rocket ship??? Higher wages ?? Globilization ? Energy prices ?? Hell, commodity prices in general ?? Loose lending now that the cat is out of the bag and run over by the car ? What is it Mr or Mrs Realtor that is going to re-ignite this rocket ship of housing that now has 10+ months of inventory nationally to digest ?

On a more personal and capitalistic note, I do have to thank BB for dropping interest rates by 50 bps the other week, because I used that as another opportunity to short a few of my favorite companies. So far, they have not disappointed.

Sep 26, 2007, 6:21:00 PM  
Blogger Matthew said...

Just an observation Marinite, but I find it interesting how many posts your blog on the San Rafael Fire Chief generated as compared to say some of these more informative (housing specific) blogs.. Hell, I even took a pop shot at the good Chief and City Council...

Speaking for myself, it's probably due to the fact that housing prices are BS, so any hand-out like this that supports or validates them pisses us off.

Of course, the sense of entitlement that is rampant throughout Marin was another thing that got under my skin as I'm sure it did with a few of your readers..

Sep 26, 2007, 6:40:00 PM  
Blogger see me said...

I have a question a little off topic...
I live in Larkspur Courts and I have seen a spike in my rent. My rent went from $1,750 last year to $1900 this year. I just signed a 1 year lease renewal on a 780 sq ft 1 BR apartment. I have noticed a similar spike among other apartment complexes in and around Marin. Does anyone know if this is related to the housing fallout? Should I ask for a 15% cost of living salary increase at work. :)))) Yeah right!

Sep 26, 2007, 7:04:00 PM  
Blogger sf jack said...

"I'd be curious to see the algorithm or model behind these forecasts. I'm sure part of it at least is based on when these markets started their downward trend."


Matthew -

Those aren't models.

I believe these are the expectations of futures traders. People who are willing to bet that this is where the markets are headed.

They're probably paying better attention to the housing markets than many lenders, hedgies and banker Pig Men ever did.

So perhaps that's why these figures at least seem realistic.

As a bone to SF and Marin housedebtors, the San Francisco figure is most likely for the SF metro region (perhaps also including at least the inner East Bay and San Mateo County).

Though that's small solace, indeed.

Sep 26, 2007, 7:07:00 PM  
Blogger sf jack said...

see you -

Yes, that's probably due to fewer people taking a flyer on housebuying these days.

Nobody likes ponying up too much money any longer for a declining "asset".

But don't worry, you have a long ways to go before it makes sense to buy... since what you pay in rent may be around 50% of what you'd pay monthly on a traditional mortgage in order to live in the same place.

This situation is not unfamilar to me, for I remember using this some time ago:




Here, try this... for you, I input:

$1900 rent
$600,000 place
10% down
6.5% rate
1.35% tax
4% annual price increase
3% annual rent increase

It says you should never buy!

Annual price increase over 30 years may or may not be aggressive for Marin (given that previously lived in homes are dropping in price as we "speak").

Annual rent increase may or may not be aggressive for Marin (given that it went up so much recently).

And how about 6.5%, can anyone with 10% down and stellar credit get $560,000 at that rate today?

In any case - don't forget to hit "Calculate"!

Sep 26, 2007, 7:23:00 PM  
Blogger Lisa said...

"I cannot help laughing when I read Realtor quotes about "this is the bottom so you better "jump" in soon".. blah, blah, blah.."

During the last CA bust (early to mid 90's), realtors called "the bottom" every month for 4 years, so get used to it -); What else can they do? Tell people that if they buy now, take on that big mortgage & property taxes, they can look forward to feeding a losing asset for the next few years?

People have become so conditioned that RE = riches, some of which are even tax free to boost. If we're really headed back towards a house is just a place to live, then the incentive to pay these prices has to be less. Seriously, with no appreciation, it's way smarter to be renting rather than buying in now.

Sep 27, 2007, 8:36:00 AM  
Blogger Original Banksta said...

That <25.4%> struck me as really peculiar relative to the others shown. My first take was that the bettors buying these contracts were using a single simplistic factor like average affordability, but that wouldn't account for NY's relatively benign -10.6%.

The what-goes-up-must-come-down theory doesn't explain it either: From Jan 2000 (when all these indices were calibrated at 100 and a rough proxy for the real start of the bubble) SF's subsequent peak index value (218) was less than the peaks for Miami(281), LA,(274) SD(250), DC,(251) and LV(235), and about the same as NY(216).

I think that I might be willing to make a spread bet that SF won't see a decline 3X that of Las Vegas, given LV's more transient population, high degree of investor purchases during the bubble, and an economy that's both less diversified and more tied to consumer discretionary.

Sep 27, 2007, 3:20:00 PM  
Blogger brazos605 said...

The futures traders may be taking into account the possibility of a major earthquake.

Sep 27, 2007, 3:42:00 PM  
Blogger marine_explorer said...

"...and a rough proxy for the real start of the bubble

Yes, and specifically for the BA, I'm also wondering if any of that housing runup during the dot.com is unsustainable? If anyone recalls the situation for Menlo Park, Palo Alto, Los Altos, etc. from 98 on, there was a noticeable pricing spike even before the bust, but prices never corrected. A modest tract home in Cupertino that would go for $400K in '96 was $800K by 2000, and prices just kept climbing.

My point is, we've seen unreasonable appreciation for so long that we've forgotten the norm. The latecomers who bought are in for a big surprise-especially in the environs of Silicon Valley, or SF's bedroom communities. The meltdown happened years ago, but the bill is still due.

Sep 27, 2007, 3:52:00 PM  
Blogger p said...

but hey, I thought "we're different" here in Marin...I thought Marin was a "special place"...goll, you mean we're NOT special?...D'OH!....or as Astro or Scooby would say, "Ruh Roh"!

Sep 28, 2007, 6:02:00 PM  

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