Miami Real Estate Housing Market for 2007: What Trading in Housing Futures Foretell

Prices of homes will even be lower a year from now in the Miami real estate housing market–at least, according to what investors speculating on housing real estates suppose. Chicago Mercantile Exchange trading in housing futures point to home price drops by August of next year amounting to 6.8 percent for the Miami real estate housing market; the predicted price decline in Miami is well above the average drop in 10 leading real estate markets of the United States.

The speculations by traders in the Chicago Mercantile Exchange (CME) are fairly consistent with the results from a survey conducted by Moody’s, which examines the 100 largest real estate markets in the U.S. predicts that real estate housing markets will first get worse before they get better again, in the perspective of property sellers of course. The survey considered mortgage rates, the local job market and other factors to come up with the figures. According to this survey, the Miami real estate housing market is yet to experience its deepest home price decline of 5.5 percent by the second quarter of 2008. Nationwide, the study forecasts a 3.6 percent decline in the sales price of existing homes.

The S&P CME Housing Futures and Options, which took off during the Spring of this year, enabled investors to circumvent against a decline in the value of housing properties in the future or to bet that those values will rise. The investments are connected with the Case-Shiller Home Price Indices. Robert Shiller, author of “Irrational Exuberance,” claims that the results of the CME trading in housing futures offer a substantial predictive value. In Shiller’s words, “[The trading results] gives us a finger on the pulse of the [real estate] markets.” As a matter of fact, prior to the launch of this trading, real estate speculators had seen a narrow opportunity to invest in housing markets short of going out and buying actual properties.

Richard DeKaser, who is National City Corporation’s chief economist, is pessimistic about the results of the trading though. According to him, because of the novelty of investment vehicles that CME introduced just this year, the trading may not offer the same level of predictive power as other derivatives products. DeKaser points out that the problem lies in the fact that real estate markets cannot be considered to be very deep markets, hence traded remarkably thinly. He is therefore considerably reluctant to attach too much value on the figures the CME is posting right now.

On the other hand, those who are doing the trading themselves seem to be betting accurately. According to Fritz Siebel, Tradition Financial Services’ director of property derivatives, the CME trading results quite fairly came close to where the actual Case-Shiller index wound up in validation tests. Therefore, if the home price drops that the trading predicts are fairly accurate, home sellers in Miami should better be wary.

Nevertheless, Shiller advises that the figures may exaggerate the degree of the decline because of a risk premium taken into account. This implies that more traders prefer to protect themselves against loss (risk aversion), rather than investing in a growing market. In the words of Shiller, “the predicted decline might be a bit bigger than the actual one.” The more realistic scenario would actually have the risk premium diminishing as the market for these derivatives swell and as investors who are willing to take the opposite position enter into it.

Nevertheless, even if all minor details are taken into account, the CME trading still points toward a fairly considerable turnaround of housing prices in Miami. As mentioned, the results are consistent with a host of other indicators, such as Moody’s survey, that apparently agree that housing prices in Miami real estates will not only equilibrate but actually plummet even more.