| Housing Futures Predict Bleak Future |
| Written by Jonathan Smoke | |
| 10.29.2008 | |
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Discuss this article on the forums. (0 posts) I enjoy reviewing the weekly TFS Housing Market Metrics report produced by the US Property Desk of Tradition Financial Services. Their report summarizes the current housing future settlement prices from the CME as well as other spot and OTC metrics. This morning’s report hit my inbox as I was reviewing yesterday’s S&P Case-Shiller release of August home price indices. The August Case-Shiller price indices showed poor performance for the tracked markets compared to July and August 2007. The only “bright spot” in the report was that the “acceleration in decline was only moderate in August.” While I did expect to see more variation in the August data than 16 out of 20 markets worsening over July, I don’t really expect the Case-Shiller indices to show any improvement in aggregate for another year. I believe the indices have a negative bias from overweighting foreclosures, which we know are at above average rates currently. So until the rate of distressed sales declines, we won’t see the 10 city, 20 city or national Case-Shiller index show much improvement. I’ve read or listened to a variety of forecasts from economists and analysts who expect that home price declines will continue for at least another year and possibly two. The bases for their forecasts vary, but few predict prices declining beyond two years. Furthermore, moderate nominal appreciation is expected after the bottoms are reached. Over the short term horizon, that’s what the futures are also telling us, but I believe the futures are biased towards a much more negative outlook for the longer horizon than we will likely see. Look at the price curve for the eastern markets in today’s TFS report: Of the five eastern-most markets, the futures are predicting a more than 9% decline one year out except in Boston, which is only expected to see a decline of 8%. At two years out, four of the eastern markets are expected to decline further, but Chicago has moderate appreciation. Looking out to 2012, only Chicago is expected to rebound to approximately 5% less than today’s prices. The rest of the eastern markets are expected to tread water at least 10% below today’s prices. The picture for the western most five markets traded on the CME are not much different: All five are expected to see 10% or more declines over the next year and then all markets decline a bit more through 2010. No market is expected to get within 12% of today’s prices by 2012. These longer term bets on where home prices will end up in these markets are extremely bleak, even though most of these 10 markets are former bubble markets. One could argue that they are reflecting depression-like assumptions emanating from the last 30+ days of negative financial news, but when you look at prior futures settlement values, the negative view has been persistent for some time. There’s really no fundamental argument for this negativity going out to 2012. The price indices are nominal, so if you factored in expected inflation, the view is basically of decline every year. By most accounts, price to rent and price to income ratios will be back to historical levels within the next 12 months or so if we see the double digit declines predicted for next year. Furthermore, the negative effect of oversupply and foreclosures will diminish over the next 12 months. With those factors absence even the Case-Shiller readings should improve 18-24 months out. This current market malaise is creating a lot of opportunity for finding real estate investments that will have good returns over a long enough horizon. These longer future expiration dates provide perhaps some of the easiest bets to make since you don’t need the dirt to take such a position. 
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