| Pondering Housing Futures’ Inflection Points |
| Written by Jonathan Smoke | |
| 11.28.2007 | |
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Discuss this article on the forums. (0 posts) To our loyal readers, I humbly apologize for not posting any new commentary for a week. First it was turkey, then football, and this week a never-ending litany of depressing but not that informative news.  Let me recap the news this week: Prices are down. Sales are down. Inventories are up. Housing malaise and foreclosures may sink the whole US into a recession if exports and investments from Middle Eastern sovereign funds don’t save us. I wish there was a good name for that state of being just after a balloon pops and the invisible particles are hurled far away from their previously collective and presumably joyous state, as that is precisely where we are right now—in a lonely disoriented funk. Eggnog, anyone? The best inspiration I saw today came courtesy of the TFS Housing Metrics Report. I enjoy seeing what the CME futures market “thinks” about future home prices, and the 5-year view is especially informative. Looking at the 5 western S&P/Case-Shiller markets and the 10-city composite, we see the prediction that home prices are likely to fall between 6 and 10% over the next year. This projection is on target with recent economic predictions from several economists as well as our own modeling. But unlike our view, the futures market is seeing price declines continuing at a slightly lower pace until the next year. Then we hit a key inflection point in which some markets go up, others slow down, and a few continue free falling. According to the market, San Francisco won’t pull out of this funk for the foreseeable future. The east follows the same pattern, including having a city in Miami that matches San Francisco in poor pricing prospects. Seems like the Dolphins and 49’ers this year, doesn’t it? While the futures remain relatively thinly traded, I do think they offer some useful insight on where the market sees things headed. One year out, the projections don’t seem too surprising. Beyond that I think the futures reveal little wisdom about the underlying fundamentals. But ignoring the absolute levels, the relative levels and the inflection points are very interesting to consider what the market is sensing. 
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