Futures traders see deeper, longer U.S. housing slump

NEW YORK (Reuters) - Traders are betting U.S. house prices will fall further, more than 20 percent in San Francisco and Miami, and remain weak through 2011, according to futures contracts that started trading this week.

New futures contracts on CME Group exchange on Friday indicated traders expected price declines of more than 10 percent across major U.S. metropolitan areas over the next four years, with drops in some cities exceeding 20 percent. The contracts were made available beyond a year by the CME at traders' requests.

The contracts are benchmarked to the Standard & Poor's/Case-Shiller Home Price indexes, which last month indicated home values suffered their worst decline in the second quarter since the data series began 20 years ago. Rising inventories of homes for sale and foreclosures due to poorly written mortgages have led many economists to push back predictions of recovery to 2009.

"You have a lot of homes that are on the market and nobody is buying because they already bought" during the housing boom and in anticipation of rising interest rates, said Eugenio Aleman, senior economist at Wells Fargo & Co. in Minneapolis. "We expect home prices to continue to go down this year and probably next year, and then a period of stability."

A recent pullback in mortgage credit available from commercial and investment banks which were burned as loose underwriting practices collided with falling house prices is also hurting sales, economists said.

The CME futures show traders expect Miami will prove the worst regional market over the next four years, with prices falling 29.1 percent by November 2011, from June 2006, the latest monthly S&P/Case-Shiller data available. San Francisco and Washington prices are seen down 26.2 percent and 20.7 percent in the period.

Prices in the Chicago, Las Vegas and the New York metropolitan areas will be down between 4 percent and 13 percent by November 2011, though they should be rebounding by then, the contracts show.

The Chicago-based CME began listing housing futures and options in May 2006. The extension of contracts to as long as five years on Monday did not provide a boost to trading, a CME spokeswoman said.

"As liquidity grows over time, this market may become the focal point for national discussions on the direction of the U.S. housing market," said Fritz Siebel, of the Tradition Financial Services' property derivatives group, in an e-mail.