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S&P/Case-Shiller Boston Snapshot: Feb 22, 2011

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PostPosted: Fri Feb 25, 2011 12:01 am GMT    Post subject: S&P/Case-Shiller Boston Snapshot: Feb 22, 2011 Reply with quote

On Tuesday, February 22nd, Standard & Poor's released the S&P/Case-Shiller housing price index data for December 2010. Boston area single family home prices fell 0.81% from one year earlier, in nominal terms, which was a decrease of 2.36% when adjusted for inflation.

The February 2011 futures contracts for the index, which cover prices in the fourth quarter of 2010, 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 2015 Q3:

  • An additional decline from the most recent month of 4.03% by 2011 Q4.
  • A recovery from that additional decline by 2013 Q3, bringing nominal prices then to essentially the same level they are at now.
  • The nominal bottom was hit in March 2009 and was a 20.07% decline from the peak.

The index for 2010 Q4 came in well above most past expectations. Expectations were set before the introduction of the various tax credits which artificially inflated demand and prices, especially in 2010 Q2 and 2010 Q3. Oddly, the expectations failed to adjust after the introduction of the credits, despite the large window of time. This may have been due to the low volume and large bid/ask spreads on the futures contracts. Fortunately, the release of the S&P/Case-Shiller numbers for December 2010 finally marks the end of the direct distortionary effects of the tax credits, although the secondary effects will likely reverberate for some time to come.

Of course, for an accurate picture of how housing values change, inflation must be considered. As of June 30, 2010, The Federal Reserve Bank of Cleveland has introduced a new year by year measure of inflation expectations which is used below to adjust future Boston home price expectations. In past reports before November 25, 2008, the futures contracts were corrected for inflation using the adjusted 10-year TIPS-derived expected inflation also 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 during interim reports was estimated using the yield on 5 year Treasuries.

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 2015 Q3:

  • An additional decline from the most recent month of 5.92% by 2011 Q4.
  • A total decline from the peak of 30.60%.

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 22nd was:

  • Feb '11 152.54
  • May '11 150.00
  • Aug '11 148.60
  • Nov '11 148.00
  • Feb '12 146.40
  • May '12 148.20
  • Aug '12 148.20
  • Nov '12 149.00
  • May '13 151.60
  • Nov '13 154.00
  • Nov '14 158.40
  • Nov '15 161.00

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:

The text of this post and the associated graphs are Copyright 2011 by with all rights reserved, except as stated here. You may reproduce the graphs individually or the text of the entire post as a whole (including graphs) under the Creative Commons Attribution-No Derivative Works 3.0 Unported License. You may additionally scale the graphs to fit your work. Alternatively, if you remove the signature from the bottom left hand corner of the images within this post, those modified images (and only those modified images) can then be distributed under the Creative Commons Attribution 3.0 Unported License. In all cases, attribution should be made via a hyperlink to or Quoting excerpts of the text is also allowed provided that the quotes would normally fall under fair use. To request other terms for reproduction, please post your request in the original thread at

The latest version of this report can be found at

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