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A Slightly Better Outlook

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By Pallavi Gogoi

A Slightly Better Outlook

Here's a small glimmer of hope on the housing front: Futures traders are betting that home prices in San Francisco will start soaring again by next year—as much as 10.8% by August 2009. Of course, in this market everything is relative. Any increase would follow a 22.9% drop in San Francisco home prices over the past 12 months, according to the S&P/Case-Shiller Home Prices Index released July 29. The projected increase might have to do with the resilience that some high-tech companies in the area are demonstrating. However, other real estate markets apparently still have some catching up to do: The futures markets expect New York home prices to fall as much as 10.7% by next August, after falling by 7.9% in the last 12 months. Traders also see prices climbing in Washington, D.C., and Chicago.

The following slides show what traders, betting on housing futures on the Chicago Mercantile Exchange, expect for the 10 largest metropolitan markets. To get the numbers, we start with the S&P/Case-Shiller index of current home prices. This index was developed by professors Robert Shiller and Karl Case in conjunction with Standard & Poor's, which, like BusinessWeek, is part of The McGraw-Hill Companies (MHP). The index for each market is based on the change in price for homes that have sold at least twice. In its latest report, the S&P/Case-Shiller index showed that prices in U.S. metropolitan cities overall declined 16.9% in the 12 months through May 2008.

The Chicago Merc allows investors to trade futures contracts based on the indexes. The following numbers are based on traders' bets on how much housing prices in the 10 markets will fall or rise by Aug. 9, 2009. Of course, investors' predictions about these markets are not guaranteed to be accurate. But they do provide insights into what people with skin in the game think lies ahead.