Notes from Jim Haughey

Jun 28 2006 12:00AM | Permalink | Email this | Comments (0) |
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Home price appreciation slipped to a 7.0% annual pace for home sales completed from mid- March to Mid-April, based on the S&P Case-Shiller housing price index which had increased 12.1% in the previous twelve months. This is the first public look at this index which is widely considered to be the most accurate measure of housing prices. The index is now announced at the end of each month, with about a ten week lag, because it is used for futures and options trading on the Chicago Mercantile Exchange.

Although trading volume in the housing index is still very thin — maybe too thin to be reliable with only 579 open contracts — the quoted prices for the housing index on June 28th show that home prices are expected to dip 1% in May and June. That period is now history although the actual price indexes will not be available for two months. Nonetheless, the signal from the financial market seems consistent with antidotal reports from realtors and homebuilders.

A further 1.4% decline in the housing price index is now anticipated from now through next April, based on quotes for the futures contract that settles next May. This is much slower decline than the 6% pace that the financial market believes occurred in the last two months. This also seems plausible. When bubbles begin to leak, there is an initial burst of air escaping which quickly tapers off to a slower leak.

This price information from the financial market is generally consistent with the volume trends included in our housing market forecast.

Not surprisingly, the volatile Miami, Los Angeles and San Diego housing markets have attracted the most futures trading while the steadier Chicago and Denver housing markets have the fewest open contracts.

The amount of home price a depreciation expected by futures traders varies considerably by city. The differences expected between cities are also plausible. A slim appreciation is expected in Denver, the city that has the least price appreciation of the ten cities over the last few years. Also, very little depreciation is expected in Chicago — where recent appreciation has been very modest — and in Boston — where price appreciation ended a year ago. The most rapid decline in home prices is expected in Miami followed by Los Angeles and San Diego. This, of course, reverses the rapid recent price appreciation in these cities, especially for Condos. A 2% plus decline is also expected in New York, probably because of the large share of condos and coops in the New York market.

Find a way to work this new market information into your planning. But be cautious, the housing futures market is still very small so there is a large error band around the future price estimates.