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On Tuesday, November 25th, Standard & Poor's released the S&P/Case-Shiller housing price index data for September 2008. Boston prices fell 5.71% from one year earlier, in nominal terms, as previously reported (Info/Broken?).

The November 2008 futures contracts for the index, which cover prices in the third quarter of 2008, were also settled on the same day. When the extended S&P/Case-Shiller futures were first introduced, Mike suggested that somebody archive the predictions of the futures contracts, and I proposed that a good time to do that would be each day that a futures contract is settled (i.e., quarterly). This post is an attempt to provide such a time capsule for the future.

Below are two graphs of the S&P/Case-Shiller Index for Boston from 1987 through the present (shown in solid purple), with the expected future values added using the values of the futures contracts on the indicated dates:

The market is pricing in the following with respect to nominal housing prices through 2013 Q3:

An additional decline from the most recent month of 9.31%.
A total decline from the peak of 19.98%.

The market expectation implied by the closing values of the futures contracts on November 25th is that nominal prices will continue to decline through 2009 Q1 and then remain relatively flat through 2013 Q3, which is as far into the future as they go. In previous snapshots, the futures implied declining prices through 2010 Q1 with relatively flat nominal prices thereafter. The movement of the nominal bottom from 2010 Q1 to 2009 Q1 is in large part due to the expected decline by 2009 Q1 growing deeper than before. In other words, the expected decline is as large as before, it is just expected to happen sooner.

Of course, flat nominal prices imply falling real prices when inflation is present. While consumer prices in the US have actually been experiencing month over month deflation for the last few months, the secular trend remains inflationary. In past reports before November 25, 2008, the futures contracts were corrected for inflation using the adjusted 10-year TIPS-derived expected inflation published by The Federal Reserve Bank of Cleveland. Unfortunately, they discontinued publication of this series on October 31, 2008 citing an "extreme rush to liquidity" as making the estimates no longer accurate. Consequently, future inflation from then on has been estimated using the yield on 5 year Treasuries. Suggestions for an improvement on this estimate are welcomed and encouraged.

Here is the same housing data adjusted for inflation, expressed as a percentage of real prices from the most recent month:

The market is pricing in the following with respect to real housing prices through 2013 Q3:

An additional decline from the most recent month of 17.24%
A total decline from the peak of 34.94%.

Note that the volume on these contracts is currently very sparse, and so using them to predict future housing prices should be viewed as unreliable. However, bear in mind that other sources of predictions are most likely even less reliable, especially organizations like The NAR which have a disincentive for accuracy. The futures markets are probably the least biased predictor available, given that those trading the contracts have a direct financial incentive to be accurate (real money rides on the accuracy).

Also note that the contract values might not necessarily reflect the expected value of the index if there are unaccounted opportunity costs involved. This was discussed in some detail in the original thread when the extended futures debuted. It is my current understanding that both the buyer and seller would have the same opportunity costs (a performance bond and transaction costs), and these costs would therefore offset each other when viewing the value as predictive. This could be wrong, though. If you would like to discuss this point, please read the original thread first since there are some references there to support the assumption of symmetry.

The settlement data for the futures contracts on the 25th was:

Nov '08 160.98
Feb '09 156.20
May '09 150.00
Aug '09 151.00
Nov '09 149.40
Feb '10 149.40
May '10 148.00
Nov '10 147.00
May '11 147.00
Nov '11 150.00
Nov '12 146.00
Nov '13 146.00

Previous snapshots are available for:

Please do try this at home, in order to bring to light any errors. The data used for the above report was obtained from the following sources:

S&P/Case-Shiller Index 1987 - present: http://www2.standardandpoors.com/ ...truncated...
Futures: http://futuresource.quote.com/quotes/quotes.jsp?s=BOS&t=Future&ref=
Past Inflation: http://www.bls.gov/cpi/
Treasury yields: http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
Future Inflation before October 31, 2008: http://www.clevelandfed.org/research/inflation/TIPS/index.cfm

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The latest version of this report can be found at http://www.bostonbubble.com/latest.php?id=spcsi_bos_snapshot

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JCK · Joined: 15 Feb 2007 Posts: 559

admin,

Have the trading volumes on these futures pick up? A year ago, I recall the volumes being very small, especially on the distant futures.

Thanks.

admin · Posted: Mon Dec 08, 2008 4:32 pm GMT Post subject: