Thursday, October 04, 2007

More Trouble Ahead for Housing: 4-Year Decline

From today's Wall Street Journal article "Home-Price Outlook Takes Another Shot: Trading on CME Indicates a Decline Into Late 2011":

Traders on the CME expect home prices in 10 major cities to drop an average of about 10% from mid-2007 to November 2011, according to an analysis of prices for housing futures traded on the exchange.

The contracts have been trading since May 2006 but last month were adapted so that traders could bet on prices as long as 60 months into the future. The current contract prices show that traders expect prices in the Miami metro area in November 2011 to be down 28% from the mid-2007 level. The expected drops in other metro areas for the same period are 18% for Las Vegas, 12% for New York, 19% for San Diego, 26% for San Francisco and 13% for Washington, D.C. (see chart above).

MP: Below (click to enlarge) is an example of the current quotes for the Miami Housing Futures Contracts from the CME, showing November 2007 contracts trading at 251.80 and November 2011 contracts at 187.80, a -25.42% difference. If you expect Miami housing prices to fall by less than (more than) 25.42% between November 2007 and November 2001, you can take a long position (short position) on this contract and make money.



3 Comments:

At 10/04/2007 8:46 AM, Blogger Gregory said...

This is not necessarily a bad thing. If prices are inflated above the cost of construction and management then it is a benefit to society for prices to fall. While it would be bad for it to fall too far, it would be worse for it to stay high, shifting undue profits from buyers and renters to existing owners.

 
At 10/04/2007 8:55 AM, Anonymous Anonymous said...

House pricing is almost all about location.

Lot prices don't quite reflect the full price of location because the real cost of location is lot price + the effort to obtain a building permit.

It took me over a year for my builder to get a permit, and I'm 60 miles south of Washington, DC.

 
At 10/04/2007 10:05 AM, Anonymous James said...

The numbers are great but the real price for a house is what someone will pay the owner for it at any given time. What's missing from these forecasts is buyer and seller psychology. Cost of housing ownership (financing and utilities for example) and potential boomer down-sizing could make a 10% decline look like a beautiful thing.

 

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