In the previous post we looked at the current value of a hypothetical home valued at $600,000 at the peak of the housing market. Using the Case-Shiller data released today, we saw that the home had dropped over $200,000.
But what will the value of this home do in the future? Answer: keep dropping. At least that is the answer if you listen to the people who are putting their money on the line.
The Chicago Mercantile Exchange trades futures contracts on the Case-Shiller real estate indexes. The price of these future contracts gives a value of what traders expect the index to do in the future.
After today's release of the October figures, there was significant volume in the Feb-09 and May-09 contracts for the San Francisco index. It must have been worse than expected because both fell (Feb-09 from 133 to 127 and May-09 from 124 to 119 - see screenshot below).
Plugging these figures into our previous graph with the $600,000 home, we see that our hypothetical home will be worth $34,181 less in February, and $56,162 less in May... dropping all the way to $326,968.
Are the futures numbers always correct? Of course not. But they are as good of an approximation as you are going to get. Any real estate agent who disagrees with the projections is free to put their money where their mouth is and could make a fortune on a real estate recovery.
It is also worth noting that to date the futures markets have consistently been overly optimistic on housing, not pessimistic.
Update: Case-Shiller futures data should be lagged 2 months (i.e. August 2009 should be June 2009).
Actually, it was never worth 600,000. That was just the speculative price based on supply and demand. The house is worth what you sell it for... And obviously that was something more like 350,000.
ReplyDeleteIf the house is worth what you sell it for, then by your definition it was worth $600k. Up until September homes in Healdsburg were still selling at these levels.
ReplyDeleteToday that price is falling and I'm guessing in the future it will be significantly lower.
But you are right that the $600,000 was speculative. I'd even argue $350k is too high.
Well thank heavens GM has a plan that can save not only the American auto industry, but homeowners and retailers as well. See the article entitled "GM Announces Plan to Save Homeowners, Auto Industry and Retailers" at
ReplyDeletehttp://watchingmarcitz.wordpress.com/2008/12/21/homeowners-auto-industry-retailers-saved-by-new-plan/
Yeah, Yeah yeah screw you stupid buyers in CA. Your house is worth nada in the future.
ReplyDeleteDon't put too much stock into the CME housing indices, look at the volume. 1 contract traded per day does not a true market make. That's not to say that housing won't continue to decline, it's depends if the gov't decides to rig the market with obscenely low interest rates and cash infusions that will steal our children's future. That will stabilize housing prices.
ReplyDeleteIt is still overpriced at $300,000.
ReplyDeleteOnly 5% of Americans make over $100,000 a year. An affordable home is 3x annual salary.
So 5% of the population can afford a $300,000 home!!!
I agree the CME market is thin but there was some volume yesterday making these prices up-to-date.
ReplyDeleteI own a house in Lone Rock Wi for $155k that I bought with cash in 2007 after selling my house in Long Beach CA for $690k
ReplyDeleteThe $155k house is about 3x income. Was the Long Beach House? Hell NO!
What is wrong with those people who still cling on to the California Dream. Newsflash. The Beach Boys are out, and the water is polluted. But there are plenty of gangs.
good riddance So cal. It was nice to know you in the 60's.
Don
Lone Rock, WI
Welcome to Realtor Voodoo Economics, where they price a house based on the price of nearby houses, called "comps". Of course the nearby houses are overvalued too, so is a comp the actual value? Nope, but Realtors don't want you to know that.
ReplyDeleteCase Schiller is interesting, but there's local data to be had that gives a much more nuanced view. I did a report for every home in Windsor that was sold as an REO this year and what it had either sold or been refinanced for during the peak of the boom. There is a big spread between the drop in value on the lower end homes (around 40-45% from their peak) and the upper middle homes (closer to a 20-25% price drop).
ReplyDeleteNobody knows what will happen in the next few years, but prices have already retreated to levels of 2002-2003, before the bubble really got inflated. If you extrapolate price appreciation from the late 1940's, we aren't too far from the trend line. The bubble, very real and painful to recover from, was a six year excursion from reality. The major recession we are experiencing may suppress prices even more or the government may act to make 4.5% fixed loans a reality in order to stabilize the housing market. As long as the Treasury can borrow money for an effective 1.6% rate, they can loan it all day at 4.5% and make a profit.
If you want to look at the charted data for Windsor REO sales in 2008, please visit:
http://reo.sonoma.net/bidding-reo/windsor-ca-reo-real-estate-values
There are WAY toomany americans ON to the game now, and you cannot trick as many into funny money loans. Anyone sane know that interest prices will rise...hmm... sometime in the next 10 years and if you are stupid enough to buy anything over a 2003 valuation in 2009 at a 4.5% loan, you're in for a long term low value once rates hit 8% at some point. Don't be stupid and pay too much everyone. Just offer pices 20% under and this will all right itself since homes escalated to ridiculous levels in such a short time. House prices are based on income and interest rates..and we all know income is NOT going up! Interest rates will rise! CAn't keep them at 5% forever!
ReplyDelete"The Treasury can borrow money for an effective 1.6% rate, they can loan it all day at 4.5% and make a profit."
ReplyDeleteThat's a bad assumption: assuming no risk in lending? That's what got us from 2001 to 2005.
here are my predictions for 2009:
ReplyDelete1. 1500 banks go away
2. 200,000 store closings
3. Dow at 5000 possibly 4000 -stays propped up by continued Govt purchases of shares and preferred shares- do not use as gauge of how economy is doing
4. S&P at 500 possibly 400
5. Mortgage rates for new homes go to 3% and resale's/refi's at 3.75% - pushed by Obama
6. Tax credit of at least 25k for home buyers
7. Chrysler is gone by March.
8. GM goes under by Sept.
9. GE files bankruptcy
10. Calf state budget deficit hits 50 Billion
11. All states and local gov'ts approach 300 billion deficits comibned
12. Massive state and local gov't layoffs nationwide
13. official unemployment hits 13%, unofficial unemployment hits 25%
14. Gas prices hover around 1.50 gallon unless there is major Mideast/Pakistani/Indian crisis then it goes to 5.00 quickly
15. GDP shrinks at 6-8% for 2009
16. Deflation takes strong hold until sept 2009, at which point hyperinflation is roaring by dec 2009.
17. US Dollar continues slow decline against Yen, Euro, Pound and Yuan - losses 75% by Dec 2009
18. 2009 Federal deficit hits 2 Trillion
19. total Bailout and govt assistance programs approach 15 trillion from when it started in summer of 2007- currently at 8 trillion
20. Total US liability approaches 60 Trillion by 2009
21. bond market collapses
22. US treasuries become almost worthless
23. China pulls the trigger and demands we pay back what we owe or they stop shipping goods to us
24. Housing values decline another 15-25% from Nov 2008 levels- Calf, Fla, AZ, Nevada see even steeper declines
25. States and local govts raise taxes on everything, unless Federal govt gives them help... this is going to be ugly
26. Obama starts giving states and companies relief on Medical insurance premiums and costs.. possible full nationalization of Health care system gets underway in 2009
27. Fed possibly nationalizes entire banking system
28. More Madoffs and ponzi scams totaling 1 trillion may happen, unless they hide the losses
29. approx 2 Trillion in more bad mortgages/losses to be absorbed by banks and govt
30. 1 in 3or4 mortgages fail. Prime and Alt A pool problem is actually worse and larger than sub prime problem
31. commercial real estate and rents fall off a cliff, 50% drop in values and 1.5 Trillion in losses.
32. Obama polls on effectiveness of handling job fall to Bush levels by end of 2009 - not his fault.
33. US possibly gets involved in much larger ground war somewhere to stimulate economy and jobs and deal with crisis in mid east/India/Pakistan/Russia/Korea
34. Credit card Debt approaches 2 trillion in losses for banks and lenders
35. the Yankees with their new 3 players they paid 1/2 billion dollars to, win the world Series, but Yankee Revenue and profit implodes and Team gets in finaiancial trouble.
36. 5-10 or more major sports teams go bankrupt in 2009
37. something happens in later part of year to unite the country... could be good or bad..
38. Govt deals with civil unrest in parts of the country.....
39. people will think things are better for 1-2 months at times during the year, only to be hit over the head with more bad economic news and problems
40. these problems will last until at least 2012 as Americas struggle with all the resetting going on in the economy, from wages, to housing, to buying, to energy, to living simpler...
41. Entire Govt and private Corp pension system is underwater by at least 4 trillion dollars and will be huge issue for Govt to deal with in 2009
42. Sonoma will see 20-40% house value redcution in 2009 look at Sacremento http://flippersintrouble.blogspot.com/
So many people wise after the fact. There are at least three ways of looking at value. One is the bricks and mortar cost of building the house, or in the US the timber and labor really. Then there's the value to a consumer, this is based on the facility or service it provides, this is the price that normally makes houses in better locations more expensive. But what we have been buying and selling houses for is a speculative value, not based on any real cost or benefit. This is usually capped by income, people can only speculate to the extent that they can afford. But that has been disconnected by the breakdown of the financial controls which were aimed to make the markets safe but prevented short term gains.
ReplyDeleteWhat's all this mean? Prices won't hit bottom until they go below what people can afford. So in the Bay Area that means they may fall to less than a third of their peak values. Then there's the extra issues, falls tend to overshoot, lots of people have trashed credit and lots of people got burned. Since average house prices were twelve times average income they have a long way to fall. Fortunately, perhaps, we don't actually need to get to the point where average people can buy average houses, the rental market takes out the lowest earners. But still, average house prices may be heading down to under $300k.
I'd like to see that CME graph glued to the windows of realty offices around Healdsburg square. The RE hype has been ludicrous, as has been local cities reliance on retail to float budgets and amount to "cultural improvements". It's been a terrible farce, and we're all going to pay.
ReplyDeleteFirst timer here--I'll bookmark your blog.
Thanks for picking up where Athena left off.I grew up in the biz,and expect a return (and overshoot) to historic norms.Gross Rental Multipliers are an easy gauge of sanity in a market area (not much use in evaluating a particular property though)and some areas are close to making sense in Sonoma County especially considering the prospect of hyperinflation.
ReplyDelete