Last week futures contracts and options based on the S&P/Case-Shiller U.S. National Home Price Index with durations of more than 12 months began trading on the Chicago Mercantile Exchange. Based on prices for contracts expiring during the next several years, investors expect deep housing price declines to continue. Investors expect the ten-city composite index to be down almost nine percent by September 2008 and over 11% by September 2009 before beginning a slight upturn for 2010 and 2011. The ten markets on which CME contracts are currently traded are mostly coastal — except for Chicago, Denver and Las Vegas – so the composite is likely showing a deeper downturn than would a more national index covering stronger markets like Seattle or Raleigh-Durham. Investors expect the worst performing market to be Miami with a breath-taking decline of over 29% by September 2011. San Francisco is also expected to decline more than 20% and San Diego and Las Vegas just short of 20%. Chicago is expected to see the smallest decline which is natural since that market also experienced relatively limited price appreciation compared to coastal markets.
Are these expectations reasonable or the narrow perspective of a small set of panicked investors? The Los Angeles market began its ascent in April 1996 and climbed steadily before hitting its peak in September 2006. Over that more than 10 year period, housing prices increased about 275%. Since hitting its peak, the LA market has declined by 4.8% as of July 2007, the most recently published S&P Case Shiller index value. CME futures investors expect a further decline of almost 15% by 2011, for a total decline of just under 20% over a period of more than five years between the market peak in July 2006 and September 2011. The prior downturn in the LA market lasted almost six years from June 1990 to March 1996 and the decline from peak to trough was over 27%. On that basis, investor expectations seem reasonable, at least for Los Angeles.
The Miami market began its last upturn in September 1992 and peaked in December 2006. During that period housing prices increased about 262%. Again, put in that context, current investor expectations don’t seem unreasonable. As many folks who joined the industry in the past few years are discovering, the real estate market — like other markets – doesn’t move in just one direction.
Note: Future price expectations are reflected in the difference between the current index value (most recently published for July 2007) and the prices of contracts expiring at future dates. Contracts expiring in November are based on the index value with a two month lag so price expectations for September 2008 are reflected in the contract expiring in November 2008. The contract prices above are as of 9/25/07.
This article was also published in Inman News.