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S&P/Case-Shiller Boston Snapshot: Aug 25, 2009

 
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PostPosted: Fri Aug 28, 2009 7:31 pm GMT    Post subject: S&P/Case-Shiller Boston Snapshot: Aug 25, 2009 Reply with quote

On Tuesday, August 25th, Standard & Poor's released the S&P/Case-Shiller housing price index data for June 2009. Boston area single family home prices fell 5.90% from one year earlier, in nominal terms.

The August 2009 futures contracts for the index, which cover prices in the second 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 additional decline from the most recent month of 5.83% by 2010 Q3.
  • A total decline from the peak of 21.18%
  • Essentially flat nominal prices from the bottom through 2013 Q3, which is as far as the futures go.

The market expectation implied by the closing values of the futures contracts on August 25th is that nominal prices have temporarily bounced off of the bottom, will return there over the coming months, and will then remain flat for as far into the future as contracts are available. Prices had previously arrived at the level predicted as the bottom by several of the past futures snapshots, but they did so earlier than predicted. This year's accentuated spring bounce brings prices back in line with the timing of the decline as predicted by previous futures snapshots.

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 13.76%
  • A total decline from the peak of 34.86%.


There was a strong month over month spring bounce this year, bringing the housing price index value from the bottom to the top of the range predicted in past snapshots and providing ample fodder for the media to proclaim that the bottom has been hit. However, it is quite plausible that this bounce was artificial and temporary thanks to the temporary $8,000 US tax credit for home buyers. At the most basic level, the tax credit plausibly (and temporarily) added $8,000 to the price of low and mid range Boston area homes. However, its side effects may have been just as important, if not more so, in producing the appearance of a particularly large spring bounce. The tax credit in conjunction with the Massachusetts program to facilitate its use as a down payment surely expanded the pool of potential buyers to people who would have otherwise not been able to buy due to an insufficient down payment. It also probably caused a time shift of home purchases which would have been made anyway, pulling demand from the beginning of 2009 as well as next year and swelling demand this spring, summer, and fall. Depressed demand in the winter would have lowered prices there and increased demand in the spring and summer would have increased prices there, and so the apparent rise from winter to summer is artificially steepened. Finally, those who purchased before the credit took affect may have mentally discounted their offer prices to make up for the credit they would be missing.

Strong evidence supporting the hypothesis that the somewhat larger than usual spring bounce this year is largely a result of the temporary tax credit can be seen in the tiered S&P/Case-Shiller Index for Boston. The bounce is very pronounced in the low tier, where the credit would have the most impact, and practically absent in the high tier, where it would be a smaller percentage of the price and where many buyers would presumably be disqualified from the credit due to the associated income limits.





Note that the volume on the futures 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:

  • Aug '09 152.71
  • Nov '09 148.00
  • Feb '10 148.00
  • May '10 146.40
  • Aug '10 148.00
  • Nov '10 143.80
  • May '11 143.80
  • Nov '11 148.40
  • May '12 146.00
  • Nov '12 144.40
  • 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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Marcus
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PostPosted: Mon Aug 31, 2009 1:05 pm GMT    Post subject: Re: S&P/Case-Shiller Boston Snapshot: Aug 25, 2009 Reply with quote

admin wrote:
The bounce is very pronounced in the low tier, where the credit would have the most impact, and practically absent in the high tier, where it would be a smaller percentage of the price and where many buyers would presumably be disqualified from the credit due to the associated income limits.


I am glad someone else noticed this. I posted this same comment on Paper Economy.

There is no mention of this disparity in the press at all, of course. I suggest you comment on the Globe real estate blog. You're never going to get Scott to understand, much less acknowledge, the workings of the real estate market, but the readers will appreciate the information.
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PostPosted: Mon Aug 31, 2009 1:18 pm GMT    Post subject: Re: S&P/Case-Shiller Boston Snapshot: Aug 25, 2009 Reply with quote

Marcus wrote:

I am glad someone else noticed this. I posted this same comment on Paper Economy.


Paper Economy beat me to the punch by a whole month, though I had forgotten about this post until I started playing with the author's new website (Blytic) this weekend:

http://paper-money.blogspot.com/2009/07/homebuyer-tax-break-propping-low-end.html

Good call, SoldAtTheTop.

Quote:
There is no mention of this disparity in the press at all, of course. I suggest you comment on the Globe real estate blog. You're never going to get Scott to understand, much less acknowledge, the workings of the real estate market, but the readers will appreciate the information.


I don't tend to comment on the Globe blog much since comments don't always make it through reliably, and there's no way to tell if a comment was successful, apart from waiting (usually hours). Maybe it's their moderation, maybe it's an overzealous spam filter. I'm not motivated to bother much anymore.

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melonrightcoast



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PostPosted: Mon Aug 31, 2009 4:43 pm GMT    Post subject: fha loans also propping the low end? Reply with quote

admin-

have you run any data (or seen any already crunched?) regarding how the fha loans are also helping prop the low-end? i believe the stimulus increased the fha loan limits to 125% of the median selling price of homes in the area (whatever that is). i have not seen this addressed in any other blog, but i believe (?) it is the only loan you can still get and only have to put 3% down. the fha loans have strict debt to income requirement (i think 29%).

i would imagine this is also helping keep prices up in some areas.
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PostPosted: Mon Aug 31, 2009 7:28 pm GMT    Post subject: Re: fha loans also propping the low end? Reply with quote

melonrightcoast wrote:

have you run any data (or seen any already crunched?) regarding how the fha loans are also helping prop the low-end?


I haven't. I do agree this would be interesting but I don't know how easy this data would be to come by.

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