A different perspective on Northeast vs. California markets

I have been accused of trashing the recent and forward-looking performance of the Northeast markets (relative to California) over the last few months.   While I’ve highlighted that implied one-year forwards, and longer-term HPAs for LAX, SDG and SFR are higher than for BOS, NYM and WDC, one counter-argument is that home prices in the Northeast didn’t fall as much as in California, and therefore have less to recover (or can recover more slowly) than the California markets.

The chart to the right is my attempt to put a picture to the relative recovery argument.

Those areas that fell the least (e.g. DEN, BOS) are the only regions with CME contract prices that exceed the past highs, despite recent slow growth.

The Northeast contracts (BOS, NYM and WDC) rank 2nd, 3rd and 4th in terms of recovery to peak (in terms of Nov 2017 contract prices).

While LAX, SDG and SFR have been rebounding sharply, the prices in the Nov. 2017 contracts are still down ~20% from past highs.

Finally, the two areas that fell the hardest (LAV and MIA) remain the furthest below past highs despite each being two of the strongest performing spot indices over the last year (trailing only SFR).

Whether regional prices are reverting to some longer-term norm, or whether forward prices might react differently once homeowners get back to “break-even” (i.e. does shadow inventory flood the market), there are a number of moving parts that traders can debate, disagree about, and hopefully trade.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have questions, or you have a strategy that you’d like to discuss.