| CME Four Year Price Decline Predictions |
| Written by Bill Russell | |
| 10.05.2007 | |
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Discuss this article on the forums. (0 posts) According to Thursday’s Wall Street Journal, the new, longer CME home price options are predicting horrendous price declines for major housing markets. The worst four year price changes are for Miami (-27.9%), San Francisco (-25.9%), San Diego (-18.6%), Las Vegas (-18.1%) and Los Angeles (-15.0%). )) For a vivid picture of what these CME futures are predicting, see the latest price curves from the weekly TFS Housing Metric Report from TFS Derivatives Corp. shown above and below. )) Historically, these declines seem very unlikely. If you look at the OFHEO home price index for the 361 metropolitan markets, which tracks most markets since 1980, markets only declined over a four year period 6.1% of the time, with an average decline of 7.3%. A decline of as much as the 27.9% forecast for Miami only occurred 0.1% of the time. These 23 severe declines happened in very small markets (in Lafayette, LA, Odessa, TX, Midland, TX, Anchorage, AK, and Casper, WY, all of which were in the late 1980s).  It is true that current inventories in these markets singled out in the Wall Street Journal are high, but since there is not a reliable and comprehensive record of housing inventories, there is no way to really know how high they are compared to past slowdowns, or how much high inventories in the past contributed to falling prices. With inventories rising, and home sales falling, it certainly looks to this economist like prices need to fall to clear the market, especially in California and Florida, but given the history, it is clear that home prices very rarely fall very much. If I were a homeowner, I would bet the house that prices don’t fall anywhere near as far as the CME is predicting, especially in the strong economy predicted over the next four years. 
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No. 1 : I agree with Bill wholeheartedly. While a decline in housing prices across many of the MSA's listed above is a necessary correction, I feel a drop of such magnitude is historically unprecedented. There is certainly an excess of supply that needs to be burned through, and affordability is a problem in most of the above mentioned markets, but the demand will continue to drive the market through this correction as it always has in the past. |
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