Housing Weakness

[ericlambi]

For those that were so sure that housing was overpriced why weren't you shorting the CME futures contract that is based on home prices? As a sidenote it is worth noting that the futures contract implies a decline of over 9% from Nov 2007 to Nov 2010. If you think that prices won't drop that much, be a hero and buy the Nov 2010 contract. Or if you believe that prices will decline by an even greater amount, be a hero and short the Nov 2010 contract.

Well, besides the obvious reasons like most average joe investors don't have accounts with the CME and don't actively trade futures, there is the fact that this product has only existed since some time in 2005. Additionally, this product trades with very little liquidity. It would have been difficult to go short at the peak, and honestly you would have made very little (so far) had you done so.

As for the -7% priced into the futures, no doubt that house prices are positively correlated with the economy. Because of this, the long contract should come with a risk premium in addition to the rational expectation of the house price appreciation/depreciation. Therefore, you would expect housing prices to depreciate less than 7% based on these futures prices. The question is, how big is the risk premium and how much depreciation is actually expected?

 

[alaskaguy]

Well, besides the obvious reasons like most average joe investors don't have accounts with the CME and don't actively trade futures, there is the fact that this product has only existed since some time in 2005. Additionally, this product trades with very little liquidity. It would have been difficult to go short at the peak, and honestly you would have made very little (so far) had you done so.

As for the -7% priced into the futures, no doubt that house prices are positively correlated with the economy. Because of this, the long contract should come with a risk premium in addition to the rational expectation of the house price appreciation/depreciation. Therefore, you would expect housing prices to depreciate less than 7% based on these futures prices. The question is, how big is the risk premium and how much depreciation is actually expected?

You make one claim that I suspect is generally true (housing prices are positively correlated with the economy) but it was not observed when I lived in Texas. The bottom dropped out of the real estate market (mid 1980s) due to liberal lending standards (or a lack of lending standards) which had caused considerable overbuilding. The overbuilding eventually caused the real estate market to crash but the non real estate economy did not suffer a similar fate.

In reference to the CME housing contracts, I was just being a wise guy bringing them up. You correctly identify the liquidity issue, the short trading history, and more importantly that speculating in commodity futures isn't something that the little guy typically succeeds in (if at all).

 

[CTTB78]

Man, there are so many trite sayings that fit this thread so well....

If it's too good to be true.......
If you can't stand the heat..........
And honest days pay......
A bird in the hand.......
Do on to others........

and one I modified for this thread.......

Better look a gift horse in the mouth!

 

[Cyclonepride]

Who's to blame for the mortgage mess? - MSN Money