Reasons for pessimism
Zandi’s predictions for specific markets are sobering. The worst-hit metro areas, he asserts, will be Cape Coral, Fla., with an 18.6% decline in housing prices; Reno, Nev., with a 17.2% drop; and Stockton, Calif., with a 15.7% fall. To conduct his analysis, Zandi looked at the supply and demand of housing, changes in mortgage rates, demographic trends, the job market and new housing (see “Can Wall Street Withstand Weak Housing?”).
The CME covers just 10 housing markets, rather than the 379 examined by Zandi. The exchange launched the trading in housing prices in May, and volumes are still modest, which may affect accuracy. Investors are predicting declines in all 10 cities over the next 12 months. In fact, by August 2007, when the one-year contract expires, futures traders expect the San Diego real estate prices will have declined 8.2%, Las Vegas 7.9% and Los Angeles 6.9%. The composite index is expected to fall 6.8%. “The markets are clearly concerned that home prices are going to fall,” says Robert Shiller, an economics professor at Yale University. Shiller helped develop the contracts with professor Karl Case and Standard & Poor’s (which, like BusinessWeek, is a unit of McGraw-Hill).
In the cases where they cover the same ground, Zandi and the CME traders have some uncanny similarities. For instance, Zandi expects San Diego to drop 8.4% through the second quarter of 2008, while the futures market is expecting a drop of 8.2% by August 2007. In Washington, D.C., Zandi expects prices to drop 12% through the second quarter of 2008, and the futures market expects a 7.7% decline by August 2007 (see “Hopeful Glimmers in the Housing Slump”).
Anybody’s guess
But in Boston, there’s a sharp contrast. Zandi thinks that the worst is over. He estimates that prices declined 2.2% in the second and third quarter of 2006, and that should be the end of the meaningful declines. “Boston’s jobs market is coming back, and the city didn’t see much froth anyway,” says Zandi. But the CME futures markets expect Boston to continue to drop, at least 7% by August 2007. Similarly, Zandi expects New York to drop 3.5% through the fourth quarter of 2008, while the futures traders are betting that New York’s real estate will drop a sharper 6% by next year.
Who would you put your money on? Zandi is certainly a smart, resourceful economist. But “predictive markets” like those used at the CME have proved surprisingly accurate in forecasting everything from the weather to political races. They’re particularly accurate when money is on the line, as it is in Chicago.
As Rick Redding, CME managing director for products and services says: “These products create a liquid and transparent market that can be used … to help reduce risks associated with holding real estate assets.” This is no academic experiment. The results of these predictions will be made all too public in the months and years ahead.
10 markets headed for trouble
City
Expected decline by August ’07*
Miami
8.5%
San Diego
8.2%
Las Vegas
7.9%
Washington, D.C.
7.7%
Boston
7%
Los Angeles
6.9%
San Francisco
6.5%
Denver
6.4%
New York
6%
Chicago
5.9%
Don’t know how much this really effects things, but I wonder if more coverage in the media will make people more aware and possibly aid in the decrease in prices since more people will be “sitting on the fence”??
As things get worse, so will the media coverage, I can only hope that it will benefit the people who wait and save
worst-hit metro areas, he asserts, will be Cape Coral, Fla., with an 18.6% decline in housing prices; Reno, Nev., with a 17.2% drop; and Stockton, Calif., with a 15.7% fall.
Following up to an old post, looks like Zandi was right about Stockton, see article below dated Sept 13th.
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