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Barbara 12-02-2007 12:02 PM

10 Housing Markets: Outlook Worsens
10 Housing Markets: Outlook Worsens
Investors see housing prices headed sharply lower over the next year

By Pallavi Gogoi

If you thought that the worst is already over in the housing market, don't hold your breath. Futures traders are betting that there’s much, much worse ahead. By next November, these traders are betting that the blood bath will continue and home prices will fall as much as 25% in San Francisco and 23.8% in Miami. The only city holding its own is Chicago, where the news isn’t that great either, but is contained in a single digit 5.6% decline.

Clearly, given the drumbeat of losses from construction companies and mortgage lenders, this is not good news. But the trend reflects what investors are expecting for major markets in the country and the warning is pretty clear – prices are headed down and the outlook is worsening.

The conclusion is based on the closing prices of housing futures traded on the Chicago Mercantile Exchange. The exchange allows investors to trade housing market indices, which were developed by professors Robert Shiller and Karl Case, in conjunction with Standard & Poor's (which like BusinessWeek is part of McGraw-Hill (MHP).

The index for each market is based on the change in price for homes that have sold at least twice. What follows in the slides ahead are the expected declines calculated by from traders' bets on how much 10 different housing markets will fall by Nov. 11, 2008. They are based on the closing prices of the futures on each of the housing indices, as traded in Chicago.

Investors' predictions about these real estate markets are certainly not guaranteed to be accurate. But they do provide insights into what people with skin in the game think lies ahead. These types of "predictive markets," as they're known, have proven surprisingly accurate in forecasting everything from housing movements to the outcome of political elections. They tend to be especially on the mark when the participants have money on the line, as they do in Chicago.

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