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[admin]

S&P/Case-Shiller Boston futures contracts for November 2012 began trading last week. They were originally listed at a value of 100, which was dramatically lower than all of the other index and futures data, so I held off on reporting them as it seemed like there was a good chance that the 100 wasn't a market-determined value. Activity on that contract has since picked up and the Chicago Mercantile Exchange has listed transactions for it, so I think it's safe to start discussing now.

Below is a graph 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 16.48%.
  
• A total decline from the peak of 21.84%.
  

Also of note, 2012 is currently priced below 2011 in nominal terms, whereas previous snapshots suggested that nominal prices may stop falling in 2010.

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, 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 27.52%
  
• A total decline from the peak of 36.45%.
  

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 today was:

• Feb '08: 167.2
  
• May '08: 162.8
  
• Aug '08: 160.0
  
• Nov '08: 160.0
  
• Feb '09: 157.6
  
• May '09: 155.4
  
• Nov '09: 151.0
  
• May '10: 148.6
  
• Nov '10: 148.0
  
• Nov '11: 150.4
  
• Nov '12: 142.6
  

Previous snapshots are available for:

• November 27, 2007
  
• October 30, 2007
  
• September 17, 2007
  

The data used for the above report was obtained from the following sources:

• S&P/Case-Shiller Index 1987 - present: http://www2.standardandpoors.com/ ...truncated...
  
• Futures: http://futuresource.quote.com/quotes/quotes.jsp?s=BOS&t=Future&ref=
  
• Past Inflation: http://www.bls.gov/cpi/
  
• Future Inflation: http://www.clevelandfed.org/research/inflation/TIPS/index.cfm
  

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- admin

[JCK]

The shape of the graph makes me think the 2012 number have not "equilibrated" yet relative to the 2011 numbers.

But thanks for the update. This will be interesting to follow over time.

[admin]

[SamChady]

Is there any data which shows the actual prices in comparison to the predicted pricing over time? If it tracked dead-on, it might be more believable for example.

Does my question even make sense?

[admin]

[admin]

Update: November 2012 has been moving up over the last few days and is now above 2010 in nominal terms, though not by enough to counter inflation. Curiously, 2011 has been moving up too, and there would still be an odd hump at the end of the graph. November 2011 is now at 151.80 and November 2012 is at 149.00. I believe (but haven't throughly checked) that the other values are unchanged, except for May 2008 which is up slightly to 163.00.

- admin

[steverino]

can't imagine who would take the other side of this bet.

None of the predictions of a turnaround in housing make any sense to me. All seem to be simply pulling numbers out of thin air. The only data points I see are the fundamentals--P/E, ratio to income, regression to the mean, that sort of thing.

Have you been following any of these pronouncements? On what basis do they sit?

[admin]

[GenXer]

Equilibrium? regression to the mean? prices 'tracking' predictions?

I think somebody has been listening to 'empty suits' for too long. Since when has any of this ever been shown to work at all? These are all artifacts of the 'bell curve', which is a GIF (Great Intellectual Fraud):

http://www.fooledbyrandomness.com/GIF.pdf

Has anybody checked the 'outliers' in the Case Shiller index? I get 4.8 sigma - the probability of this according to the 'empty suits' is near 0, yet it happens a lot more often than 0. So, unless you can demonstrate that the index behaves like a Gaussian, there is no equilibrium, regression to the mean (also doesn't work for a Gaussian, btw), or prices tracking anything other than themselves (forget 'predictions').

Just a dose of reality.

[balor123]

[admin]

Please note: this thread is three years old. It was bumped to the top of the forum last night when a spambot posted here, and then GenXer replied before I had a chance to delete the spam, so it is still near the top. The latest S&P/Case-Shiller snapshot for Boston is more timely.

GenXer, you're knocking down your own straw man again. During the height of the bubble, soon after which this three year old post was written, the "empty suits" (the vast majority) were the ones insisting that housing prices can only go up - they were not talking about equilibrium or your other straw men. Those concepts were also not the focus of this thread. I also doubt that any of the posters here were advocating them in a strict sense as economic law.

balor123, I've been wondering the same thing for quite some time. I haven't come up with anything useful yet.

- admin

[GenXer]

I have to thank the spambot, actually - this is very much relevant today, that's why I replied - it appears that the new empty suits are calling for all of the above, invoking the GIF as their reason. Still true today, unfortunately.