This week Standard & Poor’s released its S&P/Case-Shiller U.S. National Home Price Index for November 2007 and all 20 markets tracked by the index showed price declines from the previous month. Investors see more of the same ahead with declines expected through 2010.
Investor expectations are reflected in housing-price futures and options traded on the Chicago Mercantile Exchange, which are based on a 10-market subset of the S&P/Case-Shiller U.S. National Home Price Indices. Expectations of future price changes are implied by the percentage difference in the index value for the relevant market (most recently published on Jan. 29, 2008, for the November 2007 period) and the current price of traded futures contracts expiring on future dates.
Investors are predicting a decline in the 10-city composite index of 7.5 percent by September 2008 (the futures contract expiring in November 2008 settles based on that period). They are betting the downturn will continue to worsen in 2009 and 2010 with the composite index declining 12.8 percent by September 2010.
The most dramatic declines are expected in Miami with a fall of more than 23 percent and in San Francisco with a decline of more than 16 percent by 2010. Markets falling the least are Chicago, down just an additional 5.9 percent, and San Diego down 9.4 percent by September 2010.
As always, remember that these contracts are new and thinly traded relative to well-established foreign exchange or commodities contracts, and that means they are reflective of the collective wisdom of fewer investors.
This limited 10-city composite is also heavily weighted toward the same major metro markets that experienced the biggest run-ups. Smaller and less frothy markets are likely to have milder corrections.
Stephen Bedikian is a partner at Real IQ, which provides consulting and housing market analysis. He can be reached by phone at: (310) 871-3737 or by e-mail: sbedikian@realiq.com. Or contact him via his blog at http://realiq.wordpress.com/.
