S&P: Home Prices to Drop 7% Next Year

7% reduction in OC home prices - Priceless.

Shaving roughly $40K off the price of the typical OC home - Priceless.

Saving nearly $100,000 in PIT over the life of a 30-year loan - Priceless.

For increasingly cheaper housing there's the implosion of the OC RE Market, for everything else there's MasterCard.

Regular readers will recognize this format of chart as being sourced from our friends at http://www.paperdinero.com/. The chart shows the S&P Case-Shiller price index for by month for the last few years as well as the monthly predicted index value as derived from futures prices traded on the index. The line of demarcation between historic values and predicted value is the left-most of the vertical dashed lines on the right-hand side of the chart.

This chart is pretty easy to understand given that each of the predicted values is at roughly -7%. That means for the futures market expects prices to be off 7% on a year-on-year basis at least for the next 12 months. At the current price of $570,000 for the typical OC home, an additional 7% off would mean a savings of a whopping $40,000.

Personally, I think we may be looking at more than 7% YOY. Particularly post-May next year, when the resets hit in mass, I think -10% YOY is rather likely.

Regardless, if the decline in price is only 7% and that keeps me from paying roughly $100,000 in principal, interest and taxes over the life of a 30-year loan, I guess I can live with that.

Viva los Osos!

Profiting from the Weak Housing Market

Bear or bull, there's money to be made in the declining real estate market.

I found a great little ETF that allows investors to short the DJ Real Estate Index. By definition, because the ETF shorts the index, its price goes up with the DJ Real Estate Index goes down proportionately. Conversely, if the index goes up, the price of the ETF falls. The name of the ETF is UltraShort Real Estate ProShares and its trading symbol is SRS.

Now, from where I sit, there is very little positive to say about the housing market these days. And, if I am to believe what I read, things look primed to be much worse next year. While there are few guarantees in life and nearly none in the stock market, it seems like betting against the DJ RE Index makes a lot of sense.

What I find so interesting about this ETF is that that it can benefit those bearish on the RE market whether they own a home or not. For owners, buying an ETF like this one can act as a hedge against dropping home prices. For future owners, it's a way to potentially increase a future down payment.

Now with all of that said, this is still a risky investment. It's non-diversified, relatively-lightly traded, has relatively few shares outstanding, is subject to price volatility and it shorts an index that risen for most of its history. So, if you're considering getting into the ETF, discuss it with a licensed professional before you do, keep your investment to a small percentage of your portfolio and for God's sake, dollar cost average into it--it is way too volitile to try and time it.

(By means of disclosure, I invested in this ETF several weeks ago and the returns, while volitile, have been quite good. Furthermore, I am dollar-cost averaging into the ETF, buying on a dip, every few weeks.)

Viva los Osos!

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