Basics: What If CUS Index composition weights change?

The weighting for Case Shiller composite indices (e.g. CUS 10-city, referenced in the CME contracts) may be adjusted 2- 3 years after the 2010 census, per the Case Shiller index methodology.  I raise this notion to: 1) increase awareness, 2) minimize concern, and 3) invite those who better understand index calculations to weigh in.  I have no idea if, or when, this might happen, but as it might have an impact on CUS values, I wanted to start a (more public) discussion.

As a test, I used the changes in populationWhat If 4 for loosely defined geographic regions to try and estimate what the new weights might look like and how those changes might impact CUS values.  I made the simplistic leap of faith that population growth is correlated to housing stock, which I believe, will be the denominator for assigning weights by region.  The analysis is not intended to be precise but to illustrate some key moving parts in how a change in weighting might impact (if at all) the CUS index.

The population gains are primarily in the West (DEN, LAV, LAX, SDG and SFR) and South (MIA) while the losses are in the North (BOS, CHI,  NYM).  The WDC region bucks the Northeast trend.  Given my “What If” weights, the CUS index would be impacted in this analysis by -0.18.

The reason that an adjustment (using my “What If” weights) is so small is that weighting is taken away from NYM (which trades at a fairly close level to the CUS index) and redistributed to both the low priced index areas of LAV and DEN (which would pull down the CUS value) AND the high-priced areas of SDG and WDC.

(Note that any change in the allocation to SFR should have a small impact on spot CUS values as both indices have about the same value.  However this (a change in redistribution to SFR) would not be neutral to longer-dated contracts where SFR contracts trades at a premium to CUS.)

Key to any estimation/conclusion is how future index weightings might vary from this simplistic analysis.  Changes from/to the low index areas (DEN, LAV) to the high-priced index areas (LAX, WDC) might result in more pronounced changes to CUS.

Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss this theme, or any other aspect of trading home price indices.