Altos Research Real Estate Insights

Yesterday I wrote about Chicago's dubious distinction as the most socially regulated city in the US. I argue that trend does not bode well for the creative class, the city's future prosperity and ultimately its real estate values over the long haul. However today I came across a glowing article on Chicago in Fast Company, calling it "City of the Year". Indeed it's a city I love, so let's look at the positives.

Fast Company lauds some of the city's social restrictions as forward thinking "Greening" efforts. (Ironically they also posit that the city's position as anchor of 20th century architecture happened here because there was "no one to tell [the developers] to do it differently.")

Construction Booms
Most of what FC is happy about though derives from, Chicago's marvelous growth spurt. The city is the fastest-growing non-Sun Belt city in the US. The economy is growing faster than New York or LA. Immigration remains strong from all over the world.

While highrise condo development has slowed from it's frenzied pace a few years ago, I'm still excited about the Chicago's recent construction boom. The famed skyline is remains one of the most moving in the world. And its development continues. (I highly recommend the Chicago Architecture Foundation's boat tour if you have 90 minutes to spare while you're in town.) Between the 150-story Chicago Spire and the new Trump tower (who let him in there?) the city will remain on the forefront of skyscraper architecture.

With all this development, it's worth a look to see how the downtown Chicago condo market is holding up. Here's a handful of zip codes:


Let's look at demand rates also.


Like much of the country, the most desirable parts of town have (those with the higher prices already) show reasonably consistent demand and stable prices. This is not the case as you leave the hot neighborhoods.

So what's in store for the City? Construction, investment, and immigration warm my heart. Laws to dictate my diet chill me to the bone. The good news is that buildings last a long time. Bad laws can be as ephemeral as the foie gras they're restricting. Let's call this one a net positive.

Rock on Chicago.

Link: Chicago Real Estate Data

An eye-opening piece in today's Chicago Tribune today highlighting a recent Reason Magazine study that ranked the 35 biggest US on their propensity for laws restricting personal freedoms: alcohol, tobacco, food, sex, movement, gambling, guns, and a few idiosyncratic others.

The study reveals Chicago to be a stagnant brew of blue-state for-your-own-good paternalism and red-state moralism: the most governmentally controlling city in the country. And, as the article puts it, "it wasn't even close."

Maybe it's a stretch to tie this disheartening trend into the real estate market, but let me try: It's about where people want to live.

American cities have enjoyed a nearly two decades of prosperity and revitalization. They have done so as people (generally young people) sought a rebound from the stifling banality of American Suburbia. Cities bring depth and texture, excitement and engagement, grit and opportunity. These laws are designed to smooth out the very grit that people seek.

The legal activism that seeks a protective climate suitable for everyone's comfort-level winds up with a harsh climate tolerable by none.

No city is immune of course. San Francisco is incredibly nosy about what you eat, live, and move, but is ok if you like to partake in recreational drugs. Louisville may not like your bedroom practices, but a bourbon and a concealed weapon make for a good party anyway. Chicago just can't make up it's mind so Richie Daly steamrolls everyone.

The impact on housing prices is a long term one. Over time, these personal nuances are the underpinnings of a city's desirability for the next generation of creators, builders, innovators. These freedoms are what people seek cities for. Restrict at your peril.

Checking out Andy Kaufman's blog this morning, I couldn't help but noticing the contrasting AltosCharts he's showing for Oakland and Berkeley California.

Oakland of course is the bigger city, but these next-door-neighbors share some parts that are virtually indistinguishable from each other. There are some spectacular parts of Oakland and sketchy parts of Berkeley and vise versa. But look at the home price trends over the last year.

Likewise look at the trends in inventory levels for the same to cities.

You couldn't have a clearer picture of the real estate pricing phenomenon we're seeing all over the country. It works like this:

• Demand is off everywhere and everyone knows it.
• So if you're a home buyer in the East Bay with good cash and good credit, you get your pick. In this case, Berkeley has generally better schools, more cachet, etc., so the buyers go there first.
• There's enough demand to keep the market afloat.
• If you don't have good cash and good credit, you get nothing. There is literally no spillover demand for Oakland.
• A few years ago, a home buyer might look to the nicer neighborhoods in Oakland for additional inventory or a lesser school-premium price. Not the case any more.

Actually, I'm sure we could dig through the zip code level data in Oakland and illustrate a similar phenomenon within the cities themselves. But this particular story jumped out at me this morning, so that's what gets covered.

Altos Links: Oakland real estate data, Berkeley Real Estate Data

The other day, I highlighted the announcement from Bob Shiller's MacroMarkets to list exchange traded funds on the housing market. I've now had a chance to investigate more deeply and I'm giddy like a schoolgirl. (Albeit an incredibly geeky schoolgirl, but giddy nonetheless.)

First, some foundation as to why this matters.

In all businesses you have risks you can control and costs you can't: food, energy, interest rates, etc. For those costs, it makes sense to hedge. Successful jet fuel hedges are a big reason Southwest Airlines is the strongest in the country. Consumer products (e.g. cheaper airline tickets, wacky mortgages) get created on the foundation of these tools. (i.e. derivatives are a good thing.) Speculators can also participate - they add potential return to their portfolio where a hedger removes risk. Speculators create liquidity for the hedgers. (i.e. speculators are a good thing.) Financial derivatives, futures, options, swaps, etc. exist in nearly every asset class to solve these problems for people.

Likewise, lots of people and companies have real estate "exposure". This is a $21 trillion asset class people. You should be able to hedge. Especially now, people realize housing prices don't always go up. But before 2006, there were no financial products that let you hedge your real estate risk. And the only way to speculate was to buy investment property.

In 2006, MacroMarkets introduced, on the Chicago Merc, housing derivatives. Unfortunately it turned out that there were practical limitations on the housing futures that prevented nearly all potential "end-users" from participating. (The big banks could trade amongst themselves, but how fun is that?) Namely, you need big capital requirements, special trading accounts, most of the time you need a broker-dealer on the other side of your trade, and the payoff is not significantly leveraged. Perhaps I was a bit harsh to characterize MacroMarkets as having "dropped the ball" but, as of today, mere mortals basically still can't hedge their real estate risk. So how do you eliminate these hurdles?

Enter Exchange Traded Funds

ETFs are securities that trade like stocks on stock exchanges. You can play the oil price trends or diversified stock market positions simply buy buying a single "stock".

Here's how MacroMarkets' new ETFs ("MacroShares" as they call them) work for the housing market:

• The shares will list on the NYSE Arca. You can buy them from any brokerage account, like you would any stock.
• They're designed to follow the Case Shiller Index - specifically the CSI 10-City Composite, the national index. more on the implications of this below.
• The shares are issued in pairs: ticker symbol NYSE:UMM goes up when housing prices go up, NYSE:DMM goes up when housing prices go down.
• Like any stock, there's a market specialist so you always have price liquidity. You don't need to line up Goldman or Merril to take the other side of your bet.
• The shares have a par value of $25/share so when the market is heavily bearish the DMMs will trade at a premium to the $25.
• They have a 10-year horizon so you can play the longer term cycles of the housing market.
• The underlying assets get parked in short term US Treasuries, so the securities actually return a quarterly dividend.
• So the very easy trade is if you're bearish, simply buy the DMMs. Think you're seeing the bottom? Buy the UMMs. Ahh... simplicity.

Exercise some caution however, because there are nuances of how these things will behave. Namely:

• They trade in pairs that offset each other. This means if home prices double, the DMMs will go to zero and the security closes out. This happened in MacroMarkets oil MacroShares this year. AMEX:UCR and AMEX:DCR. (Those securities have market values in the billions now, so people are obviously adopting them as useful instruments.)
• That means also that the upside is limited to a 100% move. You can improve your return with margin leverage like any stock.
• As these things approach close (because of A. time or B.100% market moves) the pricing will exhibit optionality. They'll behave less like the market and more like an option.
  

But is the Case Shiller Index Useful?

The remaining challenges for these products are oriented around the data. It's easy to bitch about the Case Shiller Index: doesn't include condos, or new construction, or flips, etc., etc., etc. Add in local market peculiarities and a lot of people wonder if the CSI actually measures the housing market.

My take on this argument is that Case-Shiller is not useful for making a home purchase decision. But that doesn't preclude its usefulness in financial instruments. The fact is that the CSI 10-City Composite peaked in June 2006, and that's widely regarded as the national turning point for this housing market cycle.

The classic example of the localness problem came when Brad Inman asked Bob Shiller on stage and his conference in Miami, "So let's say I bought a $2 million home in Sausalito in 2005. How would I hedge that?" Ill distill Shiller's 10-minute-Yale-finance-prof reply into two words for you: "You can't."

With Given that these new securities are based on the CSI 10-City Composite, which is down strong in the last 12 months, they're not going to be helpful to hedge in Sausalito, which is doing just fine, thank you.

But if you're a reasonably diversified investor, brokerage, lender, builder, supplier, or yes, even if you're a speculator, this is a great way to measure US housing broadly. Given success in the market, there's no reason why they can't list regional funds too at some point in the future, to get a little closer to home.

Finally, of course, the backward-looking nature of all typical housing market data presents opportunities for clients of the Altos real-time real estate data. Rock on.

This is big, folks. Huge.

I don't imagine that this innovation is going to save anyone from foreclosure. But we're looking at the only effective way to manage your real estate assets without physically selling off properties. Think about that. Won't that be amazingly useful?

Look for these to get listed sometime in Q3 or Q4 2008. You can be sure that we'll be watching, and of course publishing data to help you trade.

More coverage: Here, here, and here.

MacroMarkets today announced that they'll be issuing New York Stock Exchange-traded securities for investors to play the US Housing Market. From the press release:

MacroShares Housing Depositor, a subsidiary of MacroMarkets LLC, filed with the Securities and Exchange Commission for exchange-traded securities
that will allow investors to invest in the upward and the inverse movement of U.S. home prices. MacroShares Major Metro Housing Up and Down securities will be based on the S&P/Case-Shiller Composite-10 Home Price Index and will allow investors to access this important, but illiquid, asset class. When launched, these revolutionary paired securities will have a ten-year term and will feature a 2x (200%) leverage factor. MacroMarkets LLC plans to launch the new securities on the NYSE Arca under the ticker symbols:

• UMM- MacroShares Major Metro Housing Up
• DMM- MacroShares Major Metro Housing Down
  

Looks to me like an ETF, which would be ideal for lowering the transaction costs and the capital requirements that have been dogging the commodities-exchange traded securities. ETFs, remember are exchange traded funds so you can invest pretty directly in an underlying asset class. In oil, for example, you can trade with the ticker symbol USO traded on the Amex.

In the couple years since launching the Chicago Merc-traded housing futures based on the S&P/Case Shiller Index, MacroMarkets is widely acknowledged to have dropped the ball. The traded volume on these markets is tiny and was restricted by steep license fees that MacroMarkets tried to extract from the Street. This winter, MacroMarkets sold to S&P the master license of the Index and droped the license fees. That was Step One. Step Two is to get products into the hands of the people who can use them. It looks like MacroMarkets is focusing on Step Two. Let's hope they learned their lesson and this product gets the volume it deserves.

While we have yet to see these securities trade on the NYSE, they're based on the Case Shiller 10-City Composite, which is good news for Altos (and our customers). We publish the Altos 10-City Composite which, whattya know, follows the same 10 cities.

Our Real Estate Derivatives weekly report is now available to subscribers who want to know where these indexes are heading with a 90-day lead. Beyond just pricing, the reports dive into all the detail real estate data: supply and demand levels, turnover, etc. If you're interested, contact us.

Meanwhile, I'm keeping my fingers crossed to see some trading volume.

We released the latest National Real Estate Report today. You can download it here [PDF].

The data inspects 26 metro markets around the country and tracks home prices, inventory and days on market. We also track the Altos 10-City Composite for a National perspective on the trends.

Here's the press release:

HOUSING PRICES DOWN BY 0.3% IN MAY

Listing Prices Fell in Only 11 of 26 markets

MOUNTAIN VIEW, CA � June 10, 2008 � The Altos 10-City Composite Price Index showed a decline in asking prices of just 0.3% in May. Prices of properties listed for-sale increased in 15 of 26 major markets according to the Real-Time Real Estate Report, jointly published by Altos Research, the premier source for real-time real estate research, and market analysis consultancy Real IQ�.

Asking prices fell at the fastest rate in Las Vegas - down 3.7% during May and 6.5% over the most recent three-month period. Listing prices rose at the fastest rate in Denver up 3.7% and Dallas up 2.2% during May. Prices increased by more than one percent for the month in 11 of 26 markets.

"The weakest markets continue to be concentrated in Florida, California, Arizona and Nevada which all experienced the fastest price increases during the boom times," said Michael Simonsen, CEO and co-founder of Altos Research. "Now these same markets are outpacing others on the downside as foreclosures and price declines continue relentlessly. We�re seeing some stability in many markets outside of these hard-hit states."

Listed property inventories increased substantially with the 10-City Composite markets showing an increase of 7.9% during the first quarter and 3.7% in May. Inventory rose in 25 of 26 markets with the Miami market being the only exception. Inventory actually declined 1.3% in Miami during May and 2.4% during the past three months.

Data in the Real-Time Housing Market Report is based on analysis of over one million properties currently listed for-sale in 26 metropolitan markets across the country. The report is the most timely source of housing market data on current market activity.

For the Altos 10-City Composite, the average days-on-market was 106 � an improvement from 111 in April and 113 in March. Miami experienced the longest time-on-market span with an average days-on-market of 152. San Francisco led all markets with the fastest rate of inventory turnover at an average of 73 days-on-market.

"Continued growth in inventory across virtually all markets will restrain near-term price increases," said Stephen Bedikian, partner and research director for Real IQ. "Markets like Denver and Dallas are showing strength because they did not experience high price inflation during the boom and are showing only limited inventory growth now. Affordability and limited inventory are the keys to a healthy market."

The report examines housing pricing, inventory levels and market conditions in 31 major U.S. metropolitan statistical areas (MSAs): Atlanta, Austin, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Houston, Indianapolis, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, Salt Lake City, San Diego, San Francisco, San Jose, Seattle, Tampa, and Washington, DC. The first report was published December 7, 2007 and is released every month. Report downloads are available at: www.altosresearch.com.

We're have an internal game here at Altos - Guess the San Jose Market Bottom. It's quite clear that you can't predict the market bottom by looking at the price chart alone, but what else should you look at? Inventory provides a clue. Check this out:

The seasonal cycles are pretty clear, no? Usually there's a summer plateau in the number of homes for sale, then properties drop off through the winter.

The question is, Is that the first inkling of a summer plateau this year?

If inventory levels flatten out this sumer then maybe, just maybe, the worst of the carnage would be over. That inventory could work its way out over the next couple years. What do you think? Is the recession going to make this chart jump even higher this fall?

Here's where you can keep an eye on the live San Jose real estate data.