Standard & Poor’s today released its S&P/Case-Shiller U.S. National Home Price Index for August 2007, and the credit crunch that recently roiled the mortgage market weighed heavily on home prices. Of the 20 markets tracked by the index, only five remain in positive territory over the past year.

However, the rate of appreciation in those markets has slowed, and even Seattle, the strongest market, showed a small monthly price decline. In fact, only two markets — Charlotte and Denver — showed a price increase for the most recent month.

Seattle is still up 5.7 percent for the past year; Charlotte is close behind at 5.6 percent; and Portland is up just 2.8 percent. Atlanta and Dallas are basically flat with 0.8 percent and 0.5 percent increases, respectively.

The worst-performing market had previously been Detroit with a 9.3 percent decline, but that dubious honor now goes to Tampa, which is showing a 10.1 percent decline over the past year. Previously hot markets including Los Angeles, Washington, D.C., Las Vegas, Miami, Phoenix and San Diego are all down more than 5 percent. The Composite Index of 20 markets was down 4.4 percent overall.

So where are we headed in the future? Investor expectations are reflected in housing-price futures and options traded on the Chicago Mercantile Exchange, which are based on a 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 Oct. 30, 2007, for August 2007 period) and the current price of traded futures contracts expiring on future dates.

Right now, investors are betting on a decline in the composite index of 7.6 percent by July 2008 (the futures contract expiring in September 2008 settles based on that period). They expect the index to still be down by 9.4 percent even in 2011. The most dramatic declines are expected in Miami with a decline of over 26 percent by 2011 and in San Francisco with a decline of over 25 percent by 2011.

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.

For example, investors are currently expecting a decline in the Denver market of over 7 percent by late 2008, but that market has logged three month of successive price gains. Unlike coastal markets, Denver did not experience outsized appreciation and so the downturn has been very moderate. In this case, investor pessimism may be misplaced and result in losses on those contracts.

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: Or contact him via his blog at

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