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S&P/Case-Shiller Boston Snapshot: Dec 6, 2007

 
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admin
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PostPosted: Thu Dec 06, 2007 10:49 pm GMT    Post subject: S&P/Case-Shiller Boston Snapshot: Dec 6, 2007 Reply with quote

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:

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

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JCK



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PostPosted: Fri Dec 07, 2007 5:15 pm GMT    Post subject: Reply with quote

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.
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PostPosted: Fri Dec 07, 2007 6:39 pm GMT    Post subject: Reply with quote

JCK wrote:
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.


I was encouraged to see that both the 2011 and 2012 contracts have seen some actual trading now, judging from the CME website. Some of the past values for the 2011 contract looked like they were an average of the bid and ask values and that nothing had actually been traded yet. I'm glad to see the increase in volume, though I think you are probably right that the values probably haven't hit equilibrium yet.

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SamChady
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PostPosted: Wed Dec 12, 2007 12:58 am GMT    Post subject: Case-Shiller Prediction Data Reply with quote

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?
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PostPosted: Wed Dec 12, 2007 1:09 am GMT    Post subject: Re: Case-Shiller Prediction Data Reply with quote

SamChady wrote:
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?


That makes perfect sense. Setting up a time capsule was actually the original motivation for these snapshots. This obviously doesn't help you gauge the accuracy now since the snapshots only started a few months ago, but hopefully it will help down the line once we've gone through a few contract settlements.

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admin
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PostPosted: Wed Dec 12, 2007 10:00 pm GMT    Post subject: Reply with quote

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.

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steverino
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PostPosted: Thu Dec 13, 2007 1:22 am GMT    Post subject: I just Reply with quote

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?
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PostPosted: Thu Dec 13, 2007 9:21 pm GMT    Post subject: Re: I just Reply with quote

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


I might. I assume that by "the other side" you mean the side that loses more money the more housing prices fall (relative to the contract value). I would like to buy a house at some point and I'm hazy on the time frame, but I am taking it slow particularly because I expect the pricing and selection to only get better from a buyer's standpoint. However, I could be wrong, and buying futures contracts would let me hedge against being wrong. If prices go down as expected, the contracts are a wash. If they go down more than expected, I lose money on the contracts, but I also get a better deal on that house down the line. If they go down less than expected, then the profit from the contracts could offset the higher cost of the home.

I haven't actually run the numbers to see if this would be worthwhile at the current contract prices, and it's just hypothetical at this point. However, I think that by buying the right number of contracts now, you could lock in that 36.45% off purchase price five years from now (or you could have - the price has changed now), or you could lock in a smaller discount at any of the times in between. One practical catch which might impede this strategy at the moment is that the trading volume is so low that the act of purchasing the first few contracts will raise the price for the subsequent ones, but this will hopefully be less of a problem over time.

I half expected the NAR and other such groups to be buying these contracts so that they could point to them as proof of an impending recovery. Perhaps that is not legal, though. Or perhaps it would be too expensive to maintain such a charade.
steverino wrote:

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?


The NAR pronouncements sit on plausible deniability, as far as I'm concerned. I haven't even bothered to consider the validity of their arguments recently since they have proven to be a waste of time in the past.

The other pronouncements I've read have been a lot more bearish, usually calling for a bottom in 2009 at the earliest, far enough away than any accuracy would be coincidental. Even so, I have yet to see any predictions which explain why their analysis differs from what the market has priced in. The provide a basis for their model but don't explain the discrepancy with the market.

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GenXer



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PostPosted: Tue Jun 01, 2010 11:41 am GMT    Post subject: Reply with quote

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.
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PostPosted: Tue Jun 01, 2010 2:11 pm GMT    Post subject: Re: I just Reply with quote

admin wrote:

However, I think that by buying the right number of contracts now, you could lock in that 36.45% off purchase price five years from now (or you could have - the price has changed now), or you could lock in a smaller discount at any of the times in between.


I would like to lock in today's mortgage rate for 5 years without buying a house. Any ideas there? Smile
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PostPosted: Tue Jun 01, 2010 2:42 pm GMT    Post subject: Reply with quote

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.

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GenXer



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PostPosted: Tue Jun 01, 2010 2:52 pm GMT    Post subject: Reply with quote

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.
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