Kicking the Tires on Housing Futures as a Predictive Tool

Les Christie of CNNMoney is checking the early returns of the housing futures markets. The number of investors is small. But early track record is reportedly pretty good, while the predictions for the New York market are not–currently the market anticipates a 6% drop by August 2007:

"The [trading results] have some predictive value and I would not expect them to be off investors’ expectations by some order of magnitude," says Richard DeKaser, chief economist for National City Corp who compiles his own market valuations. "But it is not a very deep market. It is traded very thinly. I would be reluctant to attach too much importance to the numbers right now."

So far, however, those doing the trading seem to be betting correctly. Trading yielded results earlier in the summer that came "fabulously close’" to where the actual index wound up in August, according to Fritz Siebel, director of property derivatives for Tradition Financial Services, which brokers the S&P CME Housing Futures and Options.

That’s not good news for homeowners in Boston, New York and other big markets – every one of the 10 cities covered by the indexes is showing a drop.

I suspect they’re overly pessimistic.

First of all, now it makes sense to me that this market was always destined to attract nay-sayers. There was never a shortage of ways to bet on real estate. But these markets became an easy way to bet against real estate. In short: people who believe in real estate can put their money just about anywhere. People who don’t believe in real estate? A fair number of them have to know about these new markets.

The other reason is that anyone who is invested in real estate–a huge percentage of Americans–might be wise to hedge their bet just a little. Not have all their eggs in one basket. That means some people who are betting against real estate on the Chicago Mercantile Exchange actually have bigger bets in real estate itself, and therefore would appear to actually believe real estate is a good investment, despite their behavior on the Exchange.

I have been talking about a correcting market for more than a year now and I remember my excitement when the Chicago Mercantile Exchange made it possible for people to hedge their ownership in real estate by trading in housing futures.

This article is suggesting that 10 of the top real estate markets in the United States will see declines in their housing markets over the next 12 months. Had I read this article two months ago, I would have likely seen nothing to argue. But being on the front lines in the Manhattan market is proving not only CNNMoney wrong but also me. The recent drop in interest rates, paired with a new trend in media suggesting it may have overhyped talk of a bubble seems to have created another buzz in the local market.

Of course, realistic sellers setting more appropriate asking prices and buyers feeling less overwhelmed by the past hyper-speed paced market are also buoying the Manhattan market.

And to all those who predict wildly dropping prices, I have some breaking news… prices have already dropped from their highs in New York. That said, I believe the next 6-12 months will continue to be somewhat stable as long as sellers and buyers remain realistic about their expectations. I’m not for one minute suggesting that we couldn’t see a slight decline in prices but I can’t be certain that we won’t see a slight to modest increase either. If I had to bet, I’d guess I’m not really going out on a limb here by saying that I believe the NYC market will likely be stable (+/-5%) over the next year. Maybe I should buy some housing futures…