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S&P/Case-Shiller Boston Snapshot: May 27, 2008

 
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PostPosted: Thu May 29, 2008 2:05 am GMT    Post subject: S&P/Case-Shiller Boston Snapshot: May 27, 2008 Reply with quote

On Tuesday, May 27th, Standard & Poor's released the S&P/Case-Shiller housing price index data for March 2008. Boston prices fell 5.92% from one year earlier, in nominal terms, as previously reported (Info/Broken?).

The May 2008 futures contracts for the index, which cover prices in the first 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 Q3 2012:

  • An additional decline from the most recent month of 7.28%.
  • A total decline from the peak of 19.43%.

The market expectation implied by the closing values of the futures contracts on May 27th is that nominal prices will continue to decline through 2010 Q1 and then remain relatively flat through 2012 Q3, which is as far into the future as they go. The implied price for 2012 Q3 is once again the lowest future point on the chart. However, the values from 2010 to 2012 are close enough together and the end value has been fluctuating enough that thinking about that time period as flat is probably a reasonable approximation.

Of course, flat nominal prices imply falling real prices when inflation is present (and it is). Here is the same data adjusted for inflation using the Bureau of Labor Statistics' CPI-NU series and the adjusted 10-year TIPS-derived expected inflation from May 23rd, 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 Q3 2012:

  • An additional decline from the most recent month of 20.44%
  • A total decline from the peak of 36.80%.


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 27th was:

  • May '08 158.54
  • Aug '08 155.20
  • Nov '08 153.20
  • Feb '09 154.80
  • May '09 152.80
  • Aug '09 153.00
  • Nov '09 151.00
  • May '10 148.60
  • Nov '10 149.80
  • Nov '11 150.00
  • Nov '12 147.00

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:

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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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Hard Rain
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PostPosted: Thu May 29, 2008 9:43 am GMT    Post subject: Reply with quote

Admin,

Thank you, very nice work....
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Thu May 29, 2008 3:24 pm GMT    Post subject: Reply with quote

Median single family prices went down in Massachusetts (April 2007 to April 2008) from $346k to $306k respectfully. Recorded sales in April, we know were deals made in February with closings in April. February 2007 had mortgage rates at approx. 6%, and by the next February had gone up a full point to approx. 7%.

Median Sales price $346k @6% in April 2007 with real estate taxes, home insurance yields around $2,152 monthly mortgage payment.

Median Sales price $306K @7% in April 2008 with real estate taxes, home insurance yields around $2,415 monthly mortgage payment.

[b]The difference in monthly payment from April 2007 to April 2008 is approx. a $36[/b].

You can change the assumptions around and tweak the numbers, but the full point hike in the past year accounts for almost all of the price drop.

My theory is that each year the reach height of the median buyer increases approx. 3% each year due to cost of living growing @3%. I think the $36 drop in median mortgage payment (reach height) is attributed to the montly premiums in gasoline, oil, food that have eaten further into affordability (lowering the reach height).

My second theory is that we have a working class (including many professionals) that grows at a 3% cost of living increase and another ownership rich class that grows at the income/growth stock market nest egg increase of approx. 8-10 percent. The ownership rich class (shareholders) are pumping out the profits at a rate of 8-10 percent and leaving behind the workers at a rate of 3%. These two classes have drifted further apart and without the liquidity created by the FED, we would have seen a correction in the form of a stock market correction or wage inflation. The Bush tax cuts have made the stock market go back up and when you see on a chart the point where the tax cust went in to effect, you'll clearly see that they made the market go up. The problem that they don't get is that the more money the rich got to keep, the more money they had to pay for stocks, which bid up the price of stocks. The gap between the ownership rich and working 3%'ers has widened and the real estate market is feeling the effects of this new wealth distribution in the evaluation of available housing stock. This is why we have a mixed market (a forced curve of wealth redistribution/concentration).

Fantastic job Admin as usual.
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john p



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PostPosted: Thu May 29, 2008 3:50 pm GMT    Post subject: Reply with quote

Sorry, typo:

April 2007 median mortgage payment: approx. $2,452

April 2008 median mortgage payment: approx. $2,415

Difference approx. $37 decrease from April 2007 to April 2008.
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PostPosted: Thu May 29, 2008 11:41 pm GMT    Post subject: Reply with quote

John,

Where did you get the 6% and 7% interest rate? They does not look right to me.

According to Freddiemac, 2008 rates are slight lower than 2007:

http://www.freddiemac.com/pmms/pmms30.htm[/url]
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Fri May 30, 2008 1:04 am GMT    Post subject: Reply with quote

http://www.bankrate.com/ ...truncated...

I used the Jumbo fixed (which doesn't really apply to the median price point and the example I presented; sorry).

I apologize for the mistake. What it might point to is that perhaps the jumbo rate housing stock purchases might have felt greater weight of this increase in mortgage rate which might have put downward pressure from the more expensive home price points feeling the weight of this.

God, I'm sorry...

Editor's Note: This post was edited to abbreviate a URL which was widening the page due to the way that the forum software lays out posts. No other changes have been made, and the URL still points to the original destination - only its display has been shortened.
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