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Posts Tagged ‘Robert Shiller’

[CME Housing Index] New York Market Only Index To Show Positive Future

June 13, 2006 | 12:01 am | |

Chicago Mercantile Exchange (CME), along with noted economist Robert Shiller’s MacroMarkets, as well as Fiserv and Standard & Poor’s, have created a market exchange for futures and options contracts on home prices in ten cities in the United States. The data feed from the index is provided to Matrix from Tradition Financial Services (TFS), an institutional broker that trades housing derivatives.

Trading for this new index concept began on May 22nd and trading still appears relatively light. The data set is small but intriguing so I plan to post an update 1-2 times per week.

Miami leads all markets with 86 contracts, followed by LA with 65 and Las Vegas with a distant 20 contracts. San Francisco has garnered the least activity with 2.

Of the 10 markets that have indexes, only New York showed an expected gain in the long contracts (May 2007), up 0.01%. Boston showed the greatest weakness at -3.48% followed by San Diego at -2.45%.

See archived posts in Matrix that cover the CME Housing Index

Delayed Futures & Options Quotes (up to 10 min)


This Just In From The Census Bureau: New Home Sales Stats Tell Us Absolutely Nothing

May 25, 2006 | 12:01 am | |

Every month the Census Bureau and HUD release stats on new residential one family home sales. This month the abstract from the release was as follows:

Sales of new one-family houses in April 2006 were at a seasonally adjusted annual rate of 1,198,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.9 percent (±11.5%)* above the revised March rate of 1,142,000, but is 5.7 percent (±9.8%)* below the revised April 2005 estimate of 1,270,000. The median sales price of new houses sold in April 2006 was $238,500; the average sales price was $298,300. The seasonally adjusted estimate of new houses for sale at the end of April was 565,000. This represents a supply of 5.8 months at the current sales rate.

Download the full release [pdf].

Listen to Professor Robert Shiller discuss the current real estate market. [see audio section – Bloomberg]

Economists were projecting a 6% decline from March to April but the final stats showed a 4.9% increase [Bloomberg], sending bond yields up today over inflation concerns.

But here’s why these stats from Census are essentially meaningless. Apparently I am not alone on this.

  • The historical data is constantly revised (significantly) – Amazingly, the prior 5 months of data was just revised [BW] and while the number of homes available grew 27% over the prior year and prices were up 1%.

  • The margin of error is greater than the stat – According to the press release, the 4.9% increase is actually somewhere between 16.4% above to 6.6% [Lanser OCR] below the revised March rate of 1,142,000, but is somewhere between 15.5% below to 4.1% above the revised April 2005 estimate of 1,270,000.

  • It doesn’t consider the breakdown of investor unitsHow many of the new home sales [TMR] are classified as second homes or investment properties? A deeper look into the numbers reveals that the South and West regions represented 960,000, or 80.1%, of the new homes on which paper was written. These regions host more than a few retirees, snowbirds, and also harbor plenty of vacation spots. If the sales figures represent second homes and investments to the home buyers in those regions, then we can infer that there are still plenty of speculators in the market.

  • Its a small data set and it doesn’t apply to local markets – The number of transactions is about one-seventh that of existing home sales. Since these are national stats, they are not appropriate to rely on for local market analysis.

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Robert Shiller: Hedging Our Housing Futures

May 8, 2006 | 12:04 am |

After the some of the commentary on my post Spreading The Housing Risk To Create International Consensus [Matrix] in addition to all that I have read about his efforts with CME to create a housing market index, I asked Robert Shiller who developed this index and author of Irrational Exuberance for some thoughts on the general feedback I have been receiving.

Here was his reply:

Jonathan, I am glad to see that there is such interest in these contracts. I and a couple colleagues have been involved in trying to develop these products for over 15 years. We hope at last that we will see them succeed.

The basic thrust of these comments seems to be that there are doubts how a futures contract can function when there is no possibility of physical delivery. One can’t deliver a house in fulfillment of a futures contract. That has been the problem that has delayed the development of these contracts for so long. It is also hard to derive a suitable index for house prices, since houses are not a standardized commodity, houses are all different.

The answer to these questions is not easy to summarize. I would recommend my 1993 book Macro Markets, which considers a lot of the issues.

There are also doubts about who would go long the contracts. But, I think that we are actually in a reasonably good time to find people willing to go long. Long positions in other futures contracts have been good investments over all, and a long position in real estate would be a fundamental diversifying move for investors all over the world.

But, the bottom line is that we will have to see how these contracts work in the real world and see how satisfied investors and hedgers are in them.

You can post this letter if this seems helpful.

I am really looking forward to seeing how these futures are viewed. In other words, let the markets decide.


Spreading The Housing Risk To Create International Consensus

May 5, 2006 | 12:01 am |

In this month’s column in Project Syndicate, Robert Shiller writes about The Global Home writes about his company’s collaberation with the Chicago Mercantile Exchange (CME) to create a market for futures and contracts on home prices in ten cities in the US. This has been tried before and failed but under different market conditions and public awareness. The public is much more attuned to the housing market than ever before.

The futures markets on home prices will allow investors around the world to invest in US homes indirectly, by buying interests in them through these markets. An investor in Paris, Rio de Janeiro, or Tokyo will be able to invest in owner-occupied homes in New York, Los Angeles, and Las Vegas.

A fundamental principle of financial theory , “diversification” or ,”risk spreading,” implies that interest in the new contracts will be high. People and businesses in New York, for example, are overexposed to their local real estate risks, so they should reduce this risk by selling New York home price futures. People in Tokyo will assume some of this risk by purchasing New York home price futures if the price is right. The New Yorkers still live in their own homes, but now they have spread their investment risk worldwide.

To date, the information available is either government-based or trade group based and national in scope. There is a built-in bias and a delay in some of the reporting. The underlying concept of trading these futures is that investors will be better able to manage risk by creating an international consensus.

Its going to get interesting.


Housing Going Dutch In Taking The Long Term View

March 31, 2006 | 12:01 am |

A hat tip to [Calculated Risk] for pointing me to this post on [Economist’s View] that discusses Shiller’s long-term views on the current housing boom and presents much of his recent paper Long-Term Perspectives on the Current Boom in Home Prices.

Robert Shiller looks at over 100 years of data and asks the question every homeowner wants to know: what is the short-term and long-term prognosis for real estate values? The news isn’t reassuring, but luckily risk markets are being developed to help people hedge or buy insurance against the risk that Shiller unveils. His controlled series using housing along a canal is fascinating.

For the free full version of Shiller’s work as a download which requires registration, go here.

Professor Shiller has been calling for crash of housing for the past 5-6 years and he has focused on more pyschological reasons. He is consisent with his point, similar the way the Economist magazine is on this position. Bearish on housing.

Dean Baker, Center for Economic and Policy Researh also has a paper out: The Menace of an Unchecked Housing Bubble

An unprecedented run-up in the stock market propelled the U.S. economy in the late nineties and now an unprecedented run-up in house prices is propelling the current recovery. According to Dean Baker, like the stock bubble, the housing bubble will burst. Eventually, it must. When it does, the economy will be thrown into a severe recession, and tens of millions of homeowners, who never imagined that house prices could fall, likely will face serious hardships.

For the free full version of Baker’s work as a download which requires registration, go here.

I subscribe to me Baker’s email list and find much of the publication very informative as well. He’s bearish on housing too.


To digress a bit:

Although Austin Powers made a case against the Dutch, (wink) here’s one to invoke sympathy. In Lisa Chamberlain’s article Pressing a Claim for Dutch History [NYT] she discusses the eminent domain taking of land by the Metropolitan Transit Authority from the Collegiate Church Corporation which has owned it for 282 years.

The controversies covering eminent domain takings appear to be on the rise as government authorities have more lattitude than ever before. More to come.

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What Do Cheddar Cheese, Nonfat Dry Milk and Housing Have In Common?

March 24, 2006 | 12:05 am | |

Besides the hot futures and options vehicles nearly every American trades such as cheddar cheese and nonfat dry milk (just kidding), starting March 31st, investors can now trade housing index futures as well.

The indexes will be called the S&P Case-Shiller Metro Area Home Price Indices and use calculation techniques developed by economics professors Karl Chase and Robert Shiller, author of the influential book “Irrational Exuberance.”

The press release provides a good overview: S&P Set to Launch Metro Area Home Price Indices.

There will be a composite index weight by market size and one for each of the following ten cities: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Commuter Index, San Diego, San Francisco and Washington D.C. I would venture a guess that the NY Commuter Index includes New York City, the outlying suburbs of Westchester and Fairfield Counties, Long Island and Northern New Jersey.

This index won’t render the OFHEO Housing Price Index or the various NAR indexes obsolete because this covers 10 metro markets rather than entire country.

However, it looks like the methodologies employed in this index are far better, with less bias than the NAR and OFHEO numbers. Here’s a series of white papers on the Chicago Merc’s site that sums it up nicely as follows:

_National Association of Realtor (NAR) Indexes_
– NAR indexes quoted as median home values and do not use repeat sales methodology
– Median values do not address homeowner returns and may readily be skewed if composition of housing stock changes, e.g., new luxury subdivisions are introduced to area

_Office of Federal Housing Enterprise Oversight (OFHEO)_
– Uses repeat sales methodology
– BUT … sample confined to Fannie & Freddie conforming mortgages and, therefore, skewed to low end of housing market
– Only perhaps 1/6th of California housing sold with conforming mortgages
– Uses appraisal data to supplement sample … appraisals tend to be upwardly biased?

What does a housing index that can be traded do for us?

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Judging A Book By Its Cover: David Lereah Changes Titles

February 23, 2006 | 12:06 am | Public |

According to Bubblemeter, David Lereah, the Chief Economist for the National Association of Realtors (NAR) is changing the title of his real estate book (as seen on Amazon) from:

Are You Missing the Real Estate Boom? to _Why the Real Estate Boom Will Not Bust._

Notice how the word BOOM is the same size and the graphics are identical? The Walk-through’s Old Fish In A New Wrapper says the content is the same – Damon Darlin’s post provided a pretty good chuckle.

I had the chance to meet David Lereah in the green room before the taping of CNBC’s Town Hall: Real Estate Boom last year. It was me, Suze Orman, Robert Shiller and David Lereah. Surreal to say the least. All very nice I might add. I only had a small appearance – these people were the main characters in this production.

Mr. Lereah has provided a tremendous amount of fodder for the blogosphere, myself included. Up until now, its been the use of language which would seem to be misleading. Now its book titles. This sort of stuff might have worked 5 years ago but not today. People have access to information almost immediately.

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Mind Their Behavior, Real Estate Economics Is Not All About The Numbers

February 20, 2006 | 12:01 am |

I am often struck by the volume of data that has been dissected, analyzed, processed and examined during the transition period that the housing market seems to be going through. Yet I often have the impression that the public is no more informed than before. Perhaps thats because we could be missing one important element: behavioral economics. Greed.

In the article Lunch with the FT: The man and the bubble [FT], Jim Pickard has lunch with Robert Shiller, the well-known Yale economist who wrote the book irrational exuberance and predicted the NASDAQ correction 5 years ago. Professor Shiller is someone I admire greatly, have had the pleasure of meeting and corresponding with, and have been a big fan of his work for sometime. This is what he thinks about the current state of the housing market:

Bernanke thinks there is no housing bubble,” says Shiller. “According to the White House website, he said recently that the fundamentals explained house price movements except in some speculative markets.” The new chairman of the Fed is a “brilliant man”, Shiller continues, but he has not shown any interest in behavioural economics.

And this is where he has underestimated the danger posed by real estate speculation. “He is not attuned to one of the great innovations of our time, that is, bringing psychology back into economics.

Here we come to the crux of Shiller’s theories about asset bubbles, whether tulips, shares or property: people get excited as they see the price of an asset rising, so they buy more, which pushes the prices up further until they are unsustainable. “The bubble is made by a ‘story’, by excitement and glamour,” he says. And then, once a market loses that momentum, it will experience negative feedback, where people rush to sell before things worsen further

the number crunchers have ignored the bigger picture

One striking theme within Irrational Exuberance is Shiller’s preoccupation with greed. He writes about the 60-fold rise in gambling in the US since 1962 and suggests that this new-found appetite for risk has spilled over into how people approach investment. The real estate bubble, he argues, has simply replaced the last stock market bubble as the focus of people’s avarice.

Besides, who gets to claim victory if the housing market does crash? Since the Economist magazine (which I subscribe and enjoy) has been calling the crash for about 4 years, Shiller for about that long, Bubble blogs as well as others. Who gets to lay claim to “calling it?” if something bad happens?

Shiller makes an interesting point and gambling really is everywhere [Seth Godin’s Blog] – Powerball – look at the new poker craze on television – seemingly paralleling the housing boom, however, I am not sure I agree with his attempt to actually call a crash. It makes me wonder whether a component of a crash, are the influences of experts who try to call it. Sooner or later participants in the market can actually start to believe it, doubt enters the fray and…crash – classic self-fullfilling prophecy stuff.

His theory seems to assume that a run-up in values of an asset class can only end in disaster because of human nature. I think that a weakening housing market does not necessarily behave like a weakening stock market. Housing prices are sticky on the downside, yet stock values can evaporate overnight. Housing bubbles are localized and are subject to different influences in different markets whereas stocks are much more efficient.

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A Leaky Roof But Housing Market Remains At Watershed

February 17, 2006 | 12:01 am | | Public |

In Howard Gold’s Fighting The Tape column Is It Crunch Time for Housing? [Barron’s], he suggests that this spring determines how the residential housing market, which is one of the key contributors to the economic recovery, will behave over the next several years.

The points he makes are:

Inventory is up [WSJ]
Toll Brothers reports a 29% drop in orders

Mark Zandi of writes: I don’t think nationwide you’ll see a bust,” says Mark Zandi, chief economist of Moody’s But we might in certain markets, he adds — the usual suspects like Miami, Las Vegas and Phoenix.

(and we can’t omit moi)

This is a watershed moment,” says Jonathan Miller, president and chief executive officer of Miller Samuel, a large New York real-estate appraisal firm. “If we’re going to see trouble, it’s going to be over the next 12 to 18 months.

What I mean by this is the following: Bernanke indicated today that the economy is very strong and so is housing. It has been speculated that he has at least two more rate increases in store for us until he takes a breather. That will further weaken the housing market as things continue to get more expensive for the ARM mortgage customers who largely financed the housing boom.

It’s a three- to five-year cycle on the downside,” says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. Rosen calls himself a real-estate bear who endorses the doom-and-gloom scenario of Yale University professor Robert Shiller.

We’ve already passed stage one, characterized by “a falloff in new sales and orders,” says Rosen, and are just entering stage two, in which unsold inventories build up.

Inventory and mortgage rates are the key concerns.

In Nicholas Yulico’s article Housing Starts Explode [], January new housing starts increased 12.8% above December. Initial reactions from optomists said that this was evidence that the housing market was back. Actually, the surge was due to unusually warm weather for December which enabled builders to build. This will compound inventory problems since inventory was already rising without help from new construction.

(In the Barron’s piece, I close out with moi)

“The boom is over,” declares Jonathan Miller. That perception no doubt has begun to trickle down to prospective buyers and sellers

Its a bit dramatic but its taken about 6 months for many in the real estate market to come to terms with this.

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A Quiet 2nd Home May Be No Vacation In The Future

December 16, 2005 | 12:56 pm |

In Professor Robert Shiller’s article for Project Syndicate called Home Sweet Home he discusses the changing attitudes for vacation properties. The surging demand has made their cost rival primary homes and gain market share. Their cost may outpace GDP in many countries. This is a global phenomenon.

A study by the National Association of Realtors (NAR) indicates that 13% of all homes purchased in the United States in 2004 were vacation homes. This does not include buyers who purchased homes as investment properties, mostly to rent out. According to the NAR, investment buyers account for another 23% of home sales, bringing second-home purchases to 36% of the total.

He observes that to many, it has become the true meaning of life, to the haves and not on the radar for the have nots. The rising prices will eventually knock many out of the market but that this would spur development of higher density of vacation properties. Therefore the options for quiet vacations spots will evaporate for many.

He concludes, quitely gloomily
“But, for many of those who imagine relaxing in a place that offers a quaint life of undisturbed beauty, there is a strong risk that prices will rise out of reach in future decades. No economic strategy can change that, even if it produces spectacular GDP growth.”

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Going Dutch

August 21, 2005 | 11:21 am | |


In today’s New York Times article, Professor Robert Shiller “>voices his concern about a real estate bubble. Professor Schiller is well-known for predicting the last stock market correction and possibly influencing Fed Chairman Greenspan’s use of the phrase irrational exuberance, the name of Professor Shiller’s subsequent book.

According to the article, origins of a housing bubble began with the Dutch about 400 years ago. Recently, a Dutch economist, Piet M. A. Eichholtz, a professor of Maastricht University, used Mr. Schiller’s method for converting actual sales into an index and found that the housing market saw a series of booms and busts. They found that in the long run, there was no long term trend and that prices match gains in personal income.

Mr. Shiller has a Norwegian housing index and a US Index that shows a similar pattern and is concerned that the recent run-up shows we are in a bubble.

Source: New York Times

To his critics, he says that housing charts generally go back to the 1970’s and stock market charts go back almost a century.

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Media Coverage Of The Words “Real Estate Bubble”

August 8, 2005 | 12:09 pm | |

Media coverage of the words “real estate bubble” was analyzed by our public relations firm, Publitas. The results were very interesting.

Admit it. Many of us now groan when we read another story of the housing bubble or crash (whether its true or not). The story cycle has run its course.

This is a very similar methodology employed by Robert Shiller of Yale as covered in the New York Times.

However, the Shiller analysis uses a multi-year Lexis-Nexis news search seems biased toward the later years. Major news organizations have a much greater presence on the web now than they did, say 8 or 9 years ago. The absolute number of hits should be far less in earlier years. His analysis should have been done as a percentage of total news stories.

Here’s the problem…

People are now using the logic that since information on the housing bubble has been pumped out into the mainstream ad nauseam, the odds of a market correction is now somehow less since more people are informed. Matrix thinks this is very misguided and relies on “mob mentality” too much. Safety in numbers is more of a distraction. Now that the market has made it through the hailstorm of coverage, we can start really looking at what is going on in real estate.

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