An onoing tale of two markets: Northeast & California

A recent NY Times posting (here) shows a 2-column table  with a) the % change in the 20 regional Case Shiller indices over the last year versus b) the fall from the peak value for each region (which generally occurred in 2006-07).  While the table (and very user-friendly, interactive graph) showed the change in values in numeric form, I thought that the following graph might better illustrate the point that I, and many others, have made over the last few years.

I created a scatter diagram of the two columnsScatter_Jan24 to show that the index values that fell the furthest are, generally, the ones that have bounced back the most.  (I’ve only labeled the 10 CUS index components.  The un-labeled values are the remaining components of the CUS 20-city index which also, generally follow this “rule”.)

The Case Shiller index values in the Northeast (blue circle) fell less than those in California (green circle), but have bounced back less this year (an observation to keep in mind should options trading ever restart).

Now one can debate whether the selloffs from 2006 were due to lending practices (e.g. California and LAV borrowers were anecdotally prone to higher CLTVs, while Dallas (not shown but the same values as DEN) used second liens less frequently, if at all), or whether the bounce backs were due to differences in recourse practices across regions, or whether both the selloff and faster bounce backs in the indices (not individual home prices) were more impacted by a higher concentration of distressed sales in certain regions. These may all be important considerations in understanding these indices and in trading housing futures.

I would use this table to note that real estate prices tend to trend and that the quotes on forward levels of these contracts  on the CME futures contracts (not shown here) are also consistent with the notion that the California markets will continue to improve at a faster rate than the Northeast regions, for the next 2-3 years.

Finally, while there appears to be strong correlations within regions (the 3 Northeast cities and the 3 California markets), which tends to support hedging and inter-city trading strategies, the other four areas (CHI, DEN and especially LAV and MIA) seem to be much less correlated (with challenges for trading, but benefits for diversification).

If have any questions about this blog, or care to discuss any trading strategies, please feel free to contact me at johnhdolan@homepricefutures.com.