The futures market is betting on a housing bottom for Los Angeles and San Diego out to May of 2012. This prediction seems to coincide with many of the toxic mortgage reset/recast charts that we have now etched to memory. These futures contracts reflect real money at play. People that invest and understand these more “sophisticated” investment products are betting on still significant price declines for the Los Angeles and San Diego Case Shiller measures. Interestingly enough, for San Francisco the futures market is predicting increase in prices although this is by the far the most over priced market in the state. Two out of three winning bets in Vegas makes you rich.

First, let us examine the Los Angeles chart:

I went ahead and compiled a chart that includes the latest CS data and plotted out the current futures contracts that extend out to 2014. Not much is trading beyond 2012 however. For the LA area, the markets are predicting an additional 12.8 percent price drop for the entire region. Keep in mind that for the Case Shiller data on Los Angeles we are also including Orange County.

For example, according to Case Shiller this is what is reflected:

MSA:

Los Angeles-Long Beach-Santa Ana, CA Metropolitan Statistical Area

Counties represented: Los Angeles CA, Orange CA

The San Diego MSA simply looks at San Diego County. So how much does this drop represent in prices? Let us compile that:

Are you interested in losing $42,000 or $55,000 in two years because you decide to purchase today? Keep in mind these are actual money bets predicting additional price declines from where we stand today. I would venture to say that in some areas like Culver City and Pasadena price declines will be much steeper. The futures markets do not see any price increase for the next few years. So the rush to purchase a home today doesn’t seem to be grounded on any facts or market trends.

It seems that San Diego will face the biggest price drop:



The markets are betting on a same trough date as Los Angeles but the actual price decline is much more significant. The market is predicting a 26.8% decline from the current point. What does this translate to in dollars?

Are you open to losing $88,000 in equity for buying today because of a state tax credit that doesn’t really even do much for your tax situation? Are you willing to lose $88,000 just for a low mortgage rate? Keep in mind that if you decide to sell in the future with higher interest rates, what makes you think other families will be able to afford the home with a now higher rate? Unless the state of California starts shooting out high paying jobs in mass, the market will be slow going for years to come.

The state budget and all problems associated with that will keep a lid on the housing market for years to come. It is interesting however that the futures are predicting price increases for San Francisco although this is probably the most overpriced real estate in the nation:

It doesn’t look like we’ll be heading back to the peak but prices seem to be going up at least if you believe the current bets. I tend to believe that the MSA trend with Los Angeles and San Diego will also play out up north. Local area incomes still do not justify current prices. Low interest rate or not, prices will start trending lower.

If we look at data closely it is clear that the recent tax credit that expired did pull demand forward at least in Los Angeles:

Source: L.A. Times

But what now? Now that the federal tax credit is over and the state tax credit will finish up in a few months, what will be the next step? The futures markets tend to believe we are heading down this road:

Seems that we are tracking the above even after trillions of dollars in bailouts to the Wall Street bankers. Now what really did we accomplish with all that money flowing to the banks?

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