The chart above shows the recent history of home prices for San Francisco and the greater Bay Area. The San Francisco data series (solid blue line) comes from Data Quick, and runs through August, 2008. The Bay Area data series (dashed purple line) comes from S&P/Case-Shiller, and runs through July, 2008. The purple diamonds come from the CME futures market, and represent futures market predictions for Bay Area home prices; that series runs through May, 2009.
Futures markets enable investors to sign contracts today for financial transactions that they intend to execute in the future. A typical futures contract locks in the price and terms of a transaction, but specifies that the money and goods are to be exchanged at a future date. You might enter into a futures contract if you were a farmer who wanted to lock in the sale price for some crops that you had just planted. If market prices fall between the time that you sign your contract and the time that you deliver your crops, you will have 'won' your futures bet. (Your contractually agreed sale price will be higher than the market prices that prevail at harvest time.) On the other hand, if market prices rise, you will have 'lost' your futures bet. (If you hadn't signed the contract, you could have sold your crops at a higher price.)
The housing futures market works much the same way. People who transact in this market are essentially making bets on the direction of housing prices. That doesn't make them experts. (The recent turmoil in the banking system should persuade you that even experts can be badly wrong about asset prices.) However, futures market players do have strong financial incentives to make accurate predictions about the direction of housing prices. Furthermore, these predictions take the form of publicly displayed and continuously updated futures prices, rather than fluffy language couched in caveats.
The latest futures prices imply that Bay Area housing prices will fall by another 10% between now and May, 2009. That would take housing prices back to the same level as at the beginning of 2002. (For what it's worth, that's largely consistent with other 'expert' opinions.)
By the way, the chart shows that San Francisco home prices have held up well by comparison with the rest of the Bay Area. All kinds of reasons could be offered to justify this state of affairs; I won't get into that right now. But before you dismiss what's going on in the rest of the Bay Area and say it-can't-happen-here, ask yourself if that doesn't sound like wishful thinking.
Note: The S&P/Case-Shiller indices can be found by clicking here, and the CME futures prices can be found by clicking here.
No comments:
Post a Comment