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S&P/Case-Shiller Boston Snapshot: May 26, 2009

 
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admin
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PostPosted: Fri May 29, 2009 5:44 pm GMT    Post subject: S&P/Case-Shiller Boston Snapshot: May 26, 2009 Reply with quote

On Tuesday, May 26th, Standard & Poor's released the S&P/Case-Shiller housing price index data for March 2009. Boston prices fell 8.01% from one year earlier, in nominal terms, as previously reported (Info/Broken?).

The May 2009 futures contracts for the index, which cover prices in the first quarter of 2009, 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 inconsequential additional decline from the most recent month of 0.29% by 2010 Q3.
  • A total decline from the peak of 20.31%.
  • Essentially flat nominal prices from now through 2013 Q3.

The market expectation implied by the closing values of the futures contracts on May 26th is that nominal prices have hit bottom and will remain flat for as far into the future as contracts are available. Prices are now at the level predicted as the bottom by several of the past futures snapshots. However, prices reached this level earlier than predicted. Note that the settlement value for the May contracts (2009 Q1 prices) was below all previous predictions. The futures have fairly consistently been predicting a nominal flat line after this price level was achieved, though. It will be very interesting to see if the arrival at this milestone will finally be the catalyst for movement of the longer term contracts or if the implication of a flat line will remain.

Of course, flat nominal prices imply falling real prices when inflation is present, and it is. 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 9.66%
  • A total decline from the peak of 34.09%.


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 24th was:

  • May '09 145.83
  • Aug '09 146.00
  • Nov '09 147.00
  • Feb '10 147.80
  • May '10 146.40
  • Aug '10 148.00
  • Nov '10 145.40
  • May '11 145.40
  • Nov '11 150.00
  • May '12 146.00
  • 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:

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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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balor123



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PostPosted: Sat May 30, 2009 4:46 am GMT    Post subject: Reply with quote

Futures don't indicate much of a discount here. Maybe just back to decent prices, primarily through inflation. Would be interesting to plot the housing pries adjusted by just wage inflation rather than cost of goods to see how affordability is changing.
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PostPosted: Sat May 30, 2009 2:09 pm GMT    Post subject: Reply with quote

balor123 wrote:
Futures don't indicate much of a discount here. Maybe just back to decent prices, primarily through inflation. Would be interesting to plot the housing pries adjusted by just wage inflation rather than cost of goods to see how affordability is changing.


Like this? I think that's my favorite graph. It's too bad the income data only comes out yearly.

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balor123



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PostPosted: Sat May 30, 2009 8:33 pm GMT    Post subject: Reply with quote

Yup like that. And according to that relative to income there won't be any bargains either.
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Renting in Mass



Joined: 26 Jun 2008
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Location: In a house I bought in December 2011

PostPosted: Mon Jun 01, 2009 3:22 pm GMT    Post subject: Re: S&P/Case-Shiller Boston Snapshot: May 26, 2009 Reply with quote

admin wrote:
It will be very interesting to see if the arrival at this milestone will finally be the catalyst for movement of the longer term contracts or if the implication of a flat line will remain.


That will be interesting alright! I predict it will be the catalyst for movement of the longer term contracts. No way have we hit bottom, especially if the Fed can't hold the line on interest rates.
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balor123



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PostPosted: Tue Jun 02, 2009 3:53 am GMT    Post subject: Reply with quote

I'm fairly confident the Fed won't be able to. I'm almost as confident that the dollar will plunge, so much so that I've been giving a lot of attention to protecting against it. I'm still hellbent on "staying the course" though thanks to all that propaganda academia has thrown at me that I don't think is really targeted at people like me. Since now isn't the right time for me to buy anyway, I'm comfortable at least acting on this position by not going out of my way to buy like I almost did last Spring.
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GenXer



Joined: 20 Feb 2009
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PostPosted: Tue Jun 02, 2009 11:35 am GMT    Post subject: Reply with quote

Quote:
I'm still hellbent on "staying the course"


I'm pretty close to getting together some math to be able to show some nice graphs of power-law behavior in stock and real estate prices. Basically, in a nutshell, futures are useless to predict the future price movements, because by definition, power law statistics allows for huge deviations from the ex post 'mean' (if you will, since there isn't a mean and a standard deviation definted for this distribution).

People are looking for any reason at all to make up their mind (a classic problem - Buridan's donkey), even if it means going to an astrologist (or the Fed). Humans are not designed for long-term planning and thinking (this has been shown to be true by research as well). But those of us who can delay instant gratification will reap immense rewards. Of course, we do not know when it will happen, or even IF it will happen, but the alternative is far bleaker (and the end result is less than desirable).
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PostPosted: Tue Jun 02, 2009 12:45 pm GMT    Post subject: Reply with quote

GenXer wrote:

I'm pretty close to getting together some math to be able to show some nice graphs of power-law behavior in stock and real estate prices. Basically, in a nutshell, futures are useless to predict the future price movements, because by definition, power law statistics allows for huge deviations from the ex post 'mean' (if you will, since there isn't a mean and a standard deviation definted for this distribution).


If you're taking a power-law as given because of Taleb, what he actually said was that a power-law could be used to prove his assertions, not that markets actually follow a power-law. His arguments hold whether or not the underlying forces actually follow a power-law, he just chose a power-law to make the math simpler.

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GenXer



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PostPosted: Tue Jun 02, 2009 1:55 pm GMT    Post subject: Reply with quote

Actually, I'm working on some econophysics papers which use a fair amount of statistics to help establish that the power law hypothesis is correct with a reasonable confidence without any preconceived notions. I know some prices have been shown to behave like power law, however, its not an open and shut case. For example, I'm pretty sure housing prices are not Gaussian, but I do not know what degree of 'power law' they exhibit.

Typically, you need a very good data set (many thousands, and hopefully millions of points). Then there is the lower bound issue - the distribution can be Gaussian up to a point (or log-normal, what have you). There is a lengthy list of statistical tests necessary to establish that our power law hypothesis actually holds. There are cases when it doesn't, sometimes owing to a bad data set.

I think the point of this excercise is to disprove the Gaussian distribution and to show that the tails can be 'fat'. As far as Taleb, what you don't see is actually under the hood. He did all of the same analysis, and he performed all of these statistical tests. Actually, his approach is even more conservative and all-encompassing as he is very advanced in this field. I'm only going to scratch the surface, while he and his 'buddies' have amassed a large body of math to analyze stock prices (they don't really care about anything else at this point, including real estate prices for that matter).
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