When it comes to real estate prices, everybody has an opinion. In this post-bubble market of 2007, pundits often cite various market statistics such as housing starts, median home prices, listing counts and average days on market to justify their view of future market direction. It’s often difficult to sort out the importance of these barometers both individually and collectively.
Fortunately, we can now ask Mr. Market, who distills all this information down to a simple contract price. Since May 2006, the Chicago Mercantile Exchange has offered futures contracts and options based on the S&P/Case-Shiller U.S. National Home Price Index. This index and its regional sub-indices use the repeat sales pricing technique to measure housing markets by collecting data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. Price appreciation or depreciation is more accurately reflected by the change in value of the same properties over time across entire market areas rather than the median home prices published by the National Association of Realtors.
Futures and options currently are traded on indices for a composite index and the 10 markets included in that composite: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, D.C. Expectations of future price changes are implied by the percentage difference in the published index value for the relevant market (most recently published on May 29, 2007, for the March 2007 period) and the current price of the four traded futures contracts expiring in August 2007, November 2007, February 2008 or May 2008.
So what’s Mr. Market thinking about the future of housing prices in these areas? The futures contract expiring in May 2008 will settle based on the index value for the period January-March 2008. Right now, Mr. Market is betting cold hard cash on a decline in the market of 3.25 percent by the end of the first quarter of 2008. He is most optimistic in San Francisco expecting a decline of 2.98 percent and most pessimistic on Las Vegas with an expected decline of 5.58 percent.
Note: data compiled as of market closing on June 1, 2007.
A couple of caveats are in order. 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. Futures trading is also complex with positions “marked to market” each night. A homeowner seeking to hedge the value of his home could be faced with daily margin calls if the trade goes against them.
While these contracts are not terribly helpful for the average homeowner seeking to protect himself against a market downturn, they do provide potentially valuable information. For example, if you’re planning to move to Los Angeles, it’s probably best to rent for awhile. With a median home price of $589,000, a dip of just 5.36 percent would mean about $31,000 less in your pocket. Ouch.
Stephen Bedikian is a partner with Los Angeles-based Real IQ Consulting, which provides marketing analysis and consulting services for the mortgage industry. He can be reached by e-mail at firstname.lastname@example.org.
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