House prices continued to tumble in March, according to the Case-Shiller index. Time to see what the futures say (keeping in mind the forecasting capacity of the Case Shiller futures are not well known).
Figure 1: Case-Shiller 10 city price index, (blue line), CME futures prices, 26 May 2009 (red triangle), and CME futures prices, 21 Sep 2008 (green diamond). NBER-defined recessions shaded gray, and start date dashed gray line Source: Standard and Poors’ [xls], ino.com, St. Louis FRED II, NBER, and author’s calculations.So as of March, the 10 city is 40% lower than its May 2006 peak, in log terms (37%, in percent terms). The CME futures indicate that the 10 city index will be 52.7% lower by May 2010 (41% in percent terms). Compared to last September, the trough has moved up (the trough back then was slated to be in May 2011). However, one doesn’t want to make too much of these long horizon indications, since the futures prices for these dates (November 2011 onward) have not changed since, for instance, the February 25 futures (shown in this post).Of course, futures prices incorporate both expectations and risk preferences. In addition, these markets — particularly at longer horizons — are not likely to be particularly thick, so one has to be careful about using these prices as forecasts, even if one were to assume risk neutral agents. For an alternative, one can use the forecasts of the old OFHEO indices and convert to implied Case-Shiller (see this post for example).
Here’s a graph of CPI deflated Case-Shller index. The decline has been more pronounced in real terms.
Figure 2: Case-Shiller 10 city price index, (blue line), CME futures prices, 26 May 2009 (dark blue triangle), and CPI-all deflated Case-Shiller 10 city price index (thick red line). NBER-defined recessions shaded gray, and start date dashed gray line Source: Standard and Poors’ [xls], ino.com, St. Louis FRED II, NBER, and author’s calculations.
Originally published at Econbrowser and reproduced here with the author’s permission.
Edwin G. Dolan is an economist and educator with a Ph.D. from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth College, the University of Chicago, and George Mason University. From 1990 to 2001, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. Since 2001, he has taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga, where he has an ongoing annual visiting appointment. During breaks in his teaching career, he worked in Washington, D.C. as an economist for the Antitrust Division of the Department of Justice and as a regulatory analyst for the Interstate Commerce Commission, and later served a stint in Almaty as an adviser to the National Bank of Kazakhstan. When not lecturing abroad, he makes his home in Washington's San Juan Islands.
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