The Case-Shiller home price index for Los Angeles has shown some of the most dramatic variation of any of the metropolitan statistical areas covered by the S&P-branded index. The Los Angeles home price index, as of February’s data reported yesterday, is now 40.4% below its peak. Many analysts have noted that in many MSAs the pace of the decline seems to be decelerating. More important, there’s other evidence that we’re near the floor on prices. This post explains why.
The Chicago Mercantile Exchange (see www.cme.com ) has had futures contracts trading on the Case-Shiller indices for some time. With each release of the latest Case-Shiller indices by Standard & Poor’s Corporation, Kamakura has been capturing the contemporaneous trading levels of the CME futures on the Los Angeles index. Trading is thin, but the Los Angeles index, relative to the other MSAs covered by S&P, very consistently has indicated bid and offered prices. The February 2009 Case-Shiller index reported yesterday for Los Angeles was 163.16, versus a peak of 273.94 in September 2006. For the past year, however, the bid and offered prices for the November 2010 futures contract on the Los Angeles Case-Shiller index have been remarkably stable:
Futures Contract Maturity Date Bid Price Offered Price Mid-Market Price
| Nov-10 | 7/8/2008 | 149 | 164 | 156.5 |
| Nov-10 | 7/29/2008 | 145 | 153 | |
| Nov-10 | 8/27/2008 | 146.2 | 162.2 | 154.2 |
| Nov-10 | 9/30/2008 | 146 | 155 | 150.5 |
| Nov-10 | 10/28/2008 | 146.6 | 150.4 | 148.5 |
| Nov-10 | 11/25/2008 | 142 | 150 | 146 |
| Nov-10 | 12/30/2008 | 138 | 148 | 143 |
| Nov-10 | 1/27/2009 | 144 | 151.4 | 147.7 |
| Nov-10 | 2/24/2009 | 144 | 150 | 147 |
| Nov-10 | 3/31/2009 | 144 | 151.4 | 147.7 |
| Nov-10 | 4/28/2009 | 144 | 153.2 | 148.6 |
If futures market participants have the future assessed correctly, we can expect the index to bottom out in the 145-155 range for Los Angeles. When this happens, we should see a dramatic decline in the default rates for all classes of mortgages. Stay tuned!
Donald R. van Deventer
Kamakura Corporation
Honolulu, April 29, 2009