Past
This page is linked to from just after the last chart in the page
Real Dow & Real Homes & Personal Saving & Debt Burden
The content below is follow-on elaboration of content in that page. For the three real (inflation-corrected) S&P/Case-Shiller Home Price Indices in that last chart, an index’s difference from its inferred "WILL return to" level (54., 49.4, 43.5) is here called “mispricing”. Mispricing, as percent of total price, for the three real indices is charted:



The latest % mispricings (upper R corner) remain very substantial.
The % mispricings have lately been falling fast (-1.8% is average of red and blue in latest one month).
At a glance, nearly all of the eight-plus year rise of the red series is strikingly well-fitted by a straight line! Correspondingly for rise of the blue series; for falls of both these colors over the last 18 months.
See the added (to the preceding chart) four best-fit lines following.

               Best-Fit Straight Lines              

             Interval         Slope        R-squared
red rise     3/97-7/05   (+50%)/(7.6 yr)     0.998  
blue rise   12/99-7/05   (+50%)/(8.3 yr)     0.994  
red fall     9/07-2/09   (–50%)/(3.7 yr)     0.992  
blue fall    9/07-2/09   (–50%)/(3.4 yr)     0.993  

NOTE: I surely reckon the ‘housing bubble’ as a psychological event, importantly influenced by deception, including deception by omission (FTC Act relevant?). Long-lasting real price trends is the only ‘simple’ feature I see. The straight line fits observed are surprises to me; I offer no explanation, except: falling faster than rising is consistent with ‘down is where rationality is pulling from’.

Future
The extrapolations of the two ‘fall’ straight lines beyond mid-February 2009 are shown dashed. Considering the fact of the above four straight line fits, these two (long) extrapolations are surely notable.
Red % mispricing ‘now’ (31.3% in 2/2009) extrapolates to 0% mispricing in 6/2011 -- composed of 9.7% CPI-U increase (inflation assumed = 4%/yr) plus 24.6% nominal price decrease (from 2/2009; would be 49.6% from nominal price peak in 5/2006).
Blue % mispricing ‘now’ (23.2% in 2/2009) extrapolates to 0% mispricing in 10/2010 -- composed of 6.7% CPI-U increase (inflation assumed = 4%/yr) plus 18.1% nominal price decrease (from 2/2009; would be 44.5% from nominal price peak in 6/2006).

The following dynamics are startling. If the future tracks the extrapolations of the two ‘fall’ straight lines, steepness of price decrease continues all the way down to 0% mispricing. Specifically, for the blue fall, total real price decreases by 1.8% in the next one month, and by 1.3% in the last one month. If this future is reckoned: the buyer waits!

Housing Futures Market
To review: housing prices lately have been falling fast; see for example the real home price indices in the last chart here; in the above % MISPRICING chart of the present page, the best-fit straight lines to the last 12 months extrapolate to specify future real prices, from which assumed future inflation specifies future nominal prices.

S&P/Case-Shiller 10-City Composite Home Price Index Futures trade at CME Group. To inform participants in this market, the above ‘future nominal prices’ are shown on the red line here:



Further explaining the time axis by example: 8/16/2008 is a ‘data date’, the middle of the three month July-September interval, whose average is the datum called the September 2008 Index Level, released in late November (equalled 173.25) (and also settling the NOV08 futures contract).

The red line prices are notably close to the futures market prices through early 2009, and notably much less than them thereafter.

Example sourcing: Market prices transcribed from PG46 Housing Futures And Options (102k): May 27, 2008 Section46_Housing_Futures_And_Options_2008101.pdf HOUSING FUTURES SETTLEMENT PRICE downloaded from http://www.cmegroup.com/tools-information/build-a-report.html?report=dailybulletin

Related Work

• The Calculated Risk blog.

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