bostonbubble.com Forum Index bostonbubble.com
Boston Bubble - Boston Real Estate Analysis
 
 FAQFAQ   SearchSearch   MemberlistMemberlist   UsergroupsUsergroups   RegisterRegister 
 ProfileProfile   Log in to check your private messagesLog in to check your private messages   Log inLog in 

 
Go to: Boston real estate bubble fact list with references
More Boston Bubble News...
DISCLAIMER: The information provided on this website and in the associated forums comes with ABSOLUTELY NO WARRANTY, expressed or implied. You assume all risk for your own use of the information provided as the accuracy of the information is in no way guaranteed. As always, cross check information that you would deem useful against multiple, reliable, independent resources. The opinions expressed belong to the individual authors and not necessarily to other parties.

S&P/Case-Shiller Boston Snapshot: May 31, 2011
Goto page 1, 2  Next
 
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond
View previous topic :: View next topic  
Author Message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1821
Location: Greater Boston

PostPosted: Fri Jun 03, 2011 1:14 pm GMT    Post subject: S&P/Case-Shiller Boston Snapshot: May 31, 2011 Reply with quote

On Tuesday, May 31st, Standard & Poor's released the S&P/Case-Shiller housing price index data for March 2011. Boston area single family home prices fell 2.66% from one year earlier, in nominal terms, which was a decrease of 5.06% when adjusted for inflation.

The May 2011 futures contracts for the index, which cover prices in the first quarter of 2011, 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:

  • No additional nominal declines.
  • The nominal bottom was hit in March 2009 and was a 20.07% decline from the peak.

While the index for 2011 Q1 fell roughly in the middle of expectations from past snapshots, it was noticeably lower than the most recent expectations. This was enough of a surprise to elicit commentary from the official market maker for the futures. Normally, the futures get more accurate as their settlement date approaches, but the opposite appears to have happened in this case. Perhaps this suggests the existence of an arbitrage opportunity given that the data which is used to construct the S&P/Case-Shiller Index is publicly available in advance of the settlement dates.

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 1.54% by 2011 Q4.
  • A total decline from the peak of 30.99%.


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 31st was:

  • May '11 147.36
  • Aug '11 149.80
  • Nov '11 151.00
  • Feb '12 150.40
  • May '12 149.80
  • Aug '12 149.00
  • Nov '12 151.00
  • May '13 151.60
  • Nov '13 154.00
  • May '14 154.00
  • 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 bostonbubble.com 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 bostonbubble.com 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 http://www.bostonbubble.com/forums/viewtopic.php?t=3477 or http://www.bostonbubble.com/ 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 http://www.bostonbubble.com/forums/viewtopic.php?t=3477

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

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
Renting in Mass



Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011

PostPosted: Fri Jun 03, 2011 2:47 pm GMT    Post subject: Reply with quote

Quote:
While the index for 2011 Q1 fell roughly in the middle of expectations from past snapshots, it was noticeably lower than the most recent expectations. This was enough of a surprise to elicit commentary from the official market maker for the futures. Normally, the futures get more accurate as their settlement date approaches, but the opposite appears to have happened in this case.


What do you think that means?

Quote:
Perhaps this suggests the existence of an arbitrage opportunity given that the data which is used to construct the S&P/Case-Shiller Index is publicly available in advance of the settlement dates.


Let's do it! I'll chip in some cash if you do all the work. Wink
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1821
Location: Greater Boston

PostPosted: Fri Jun 03, 2011 3:09 pm GMT    Post subject: Reply with quote

Renting in Mass wrote:

What do you think that means?

That there aren't enough people buying the contracts to make the market as efficient as it could be.

Renting in Mass wrote:

Let's do it! I'll chip in some cash if you do all the work. Wink


Hah - careful... There are plenty of people who would take you up on that type of thing but without providing added value (not necessarily intentionally so). Regardless, for this case in particular, I ran some back of the envelope calculations awhile ago and while I think that there is some money to be made, it's small enough that pooling cash wouldn't make sense. The total isn't huge and there are diminishing returns. It's the type of thing I would try on my own if I were underemployed, but I'm not right now. (Disclaimer: if anybody else tries this, there is risk involved, and it's all yours.)

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
FreedomCM
Guest





PostPosted: Fri Jun 03, 2011 5:19 pm GMT    Post subject: Reply with quote

wow, excellent once again.

thanks for presenting this.
Back to top
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1821
Location: Greater Boston

PostPosted: Fri Jun 03, 2011 9:25 pm GMT    Post subject: Reply with quote

FreedomCM wrote:
wow, excellent once again.

thanks for presenting this.


You're welcome. Thanks for reading it.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Sat Jun 04, 2011 12:12 am GMT    Post subject: Reply with quote

admin wrote:
(Disclaimer: if anybody else tries this, there is risk involved, and it's all yours.)

- admin


That's the arb game. Find a small inefficiency and leverage the hell out of it.
Back to top
View user's profile Send private message Send e-mail
GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Sun Jun 05, 2011 12:08 am GMT    Post subject: Reply with quote

If it was that easy, everybody would make millions. That's the best way to lose everything and then some. Who ever said the models tell you the truth? They don't. The data is limited to the point where statistics is useless (because there isn't any to speak of).
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1821
Location: Greater Boston

PostPosted: Sun Jun 05, 2011 3:18 am GMT    Post subject: Reply with quote

GenXer wrote:
If it was that easy, everybody would make millions. That's the best way to lose everything and then some. Who ever said the models tell you the truth? They don't. The data is limited to the point where statistics is useless (because there isn't any to speak of).


The inefficiencies I pointed out have nothing to do with betting on a model. They have to do with calculating the S&P/Case-Shiller Index before it is officially published. There is a 2 - 5 month lag between when the (public) data is generated and when the resulting index is published.

I wouldn't call that "easy". It's probably doable, but it would take a good bit of effort. It also wouldn't make millions. The act of doing this would actually eliminate this particular inefficiency pretty quickly. My back of the envelope calculations earlier suggested an optimistic annual return on the order of tens of thousands of dollars before this inefficiency is squeezed out. Leverage would therefore be of no benefit at all either. This is not a way to get rich nor something that everybody could do (I doubt most people could, actually).

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Mon Jun 06, 2011 4:18 pm GMT    Post subject: Reply with quote

admin wrote:
GenXer wrote:
If it was that easy, everybody would make millions. That's the best way to lose everything and then some. Who ever said the models tell you the truth? They don't. The data is limited to the point where statistics is useless (because there isn't any to speak of).


The inefficiencies I pointed out have nothing to do with betting on a model. They have to do with calculating the S&P/Case-Shiller Index before it is officially published. There is a 2 - 5 month lag between when the (public) data is generated and when the resulting index is published.

I wouldn't call that "easy". It's probably doable, but it would take a good bit of effort. It also wouldn't make millions. The act of doing this would actually eliminate this particular inefficiency pretty quickly. My back of the envelope calculations earlier suggested an optimistic annual return on the order of tens of thousands of dollars before this inefficiency is squeezed out. Leverage would therefore be of no benefit at all either. This is not a way to get rich nor something that everybody could do (I doubt most people could, actually).

- admin


This reminds me of the joke about the economist seeing a $100 bill on the ground. He doesn't bother picking it up because there's no way that a $100 bill would actually be on the ground.
Back to top
View user's profile Send private message
GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Wed Jun 08, 2011 12:26 pm GMT    Post subject: Reply with quote

This reminds me of all the geniuses who are out there losing money on sure-fire strategies to make money in the stock market. We seemed to have run out of $100 bills in the past decade.
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1821
Location: Greater Boston

PostPosted: Wed Jun 08, 2011 12:29 pm GMT    Post subject: Reply with quote

GenXer wrote:
This reminds me of all the geniuses who are out there losing money on sure-fire strategies to make money in the stock market. We seemed to have run out of $100 bills in the past decade.


If you don't understand it, then don't do it. That should be the first rule of everybody's investment strategy.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
GenXer



Joined: 20 Feb 2009
Posts: 703

PostPosted: Wed Jun 08, 2011 12:36 pm GMT    Post subject: Reply with quote

admin wrote:
GenXer wrote:
This reminds me of all the geniuses who are out there losing money on sure-fire strategies to make money in the stock market. We seemed to have run out of $100 bills in the past decade.


If you don't understand it, then don't do it. That should be the first rule of everybody's investment strategy.

- admin


Actually, I'd reverse that. If you THINK you understand it, don't do it. In the fat-tailed domain, nobody really has the full understanding of anything because people use the wrong methods to analyze data, extracting information that is not there. Hence, most of the so-called experts think they know what they are doing, but in reality they make very big mistakes (and of course, blow up). The first mistake is to take their knowledge too seriously.

This is why I advocate to plead ignorance, and to do something that works regardless of whether you are right or wrong about the future.
Back to top
View user's profile Send private message
admin
Site Admin


Joined: 14 Jul 2005
Posts: 1821
Location: Greater Boston

PostPosted: Wed Jun 08, 2011 12:45 pm GMT    Post subject: Reply with quote

GenXer wrote:

This is why I advocate to plead ignorance,


How far does that go? Do you plead ignorance as to what 2 + 2 equals?

GenXer wrote:

and to do something that works regardless of whether you are right or wrong about the future.


There is no such thing. You cannot avoid all black swans.

- admin
Back to top
View user's profile Send private message Send e-mail Visit poster's website
JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Wed Jun 08, 2011 1:22 pm GMT    Post subject: Reply with quote

GenXer wrote:
This reminds me of all the geniuses who are out there losing money on sure-fire strategies to make money in the stock market. We seemed to have run out of $100 bills in the past decade.


Missing the point, I see, and changing the topic at the same time.

I don't know if admin is wrong or right on whether some money can be squeezed out of the C-S futures, but in a relatively low volume market, it is not inconceivable that there are inefficiencies that can be exploited by someone willing to do a bit of legwork. You are dismissing what he is saying out of hand, without any evidence one way or the other.

Your argument is that economic(?) theory says there can't be such inefficiencies, so therefore what admin is seeing can't exist. It is the exact same argument as to why there can never be a $100 bill on the ground.

I certainly agree that one cannot make a plan out finding $100 bills on the ground, or making a living exploiting the kinds of inefficiencies that admin may have found, which is what your comment seems to be driving at. But that's a very different question from whether the inefficiency exists at all or whether that piece of paper on the ground is a $100 bill.
Back to top
View user's profile Send private message
Beaumontv
Guest





PostPosted: Tue Jun 21, 2011 7:17 pm GMT    Post subject: Reply with quote

Fat tails can be understood--which is not the same as saying they can all be predicted long in advance. But there are many quantitative types who deal with them well. Taleb was creating a straw man when he was tlking about "everyone" blindly following normal distribution models.

While we can't know the future, we can get the odds. Just because the card drawn from the deck can't be predicted does not mean that the odds can't be determined to some degree. Pleading ignorance is a cop out. There is no perfect investment that goes up in value regardless of what happens.

I suggest reading some of the work done by quant experts such as John Hull, Phillipe Jorion, Blake LeBaron or Robert Jarrow. Additionally, I would suggest reading up on statistical mechanics, econophysics, and the work coming out of the Sanata Fe institute. LAszlo Barabasi has done good work on distributions as has Steven Strogatz. For behavioral models of cascades and phase transitions (fat tails) Duncan Watts many papers are good reading.
Back to top
Display posts from previous:   
Post new topic   Reply to topic    bostonbubble.com Forum Index -> Greater Boston Real Estate & Beyond All times are GMT
Goto page 1, 2  Next
Page 1 of 2

 
Jump to:  
You can post new topics in this forum
You can reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Forum posts are owned by the original posters.
Forum boards are Copyright 2005 - present, bostonbubble.com.
Privacy policy in effect.
Powered by phpBB © 2001, 2005 phpBB Group