July was quiet with price changes (and activity) taking place primarily just before and after the release of the Case Shiller #’s. Prices were generally lower. There were 5 trades, across 4 expirations and 2 regions (CUS and SFR).
Bid/Ask spreads were slightly tighter but most of that was concentrated in 5 regions (CUS, DEN, MIA, SFR and WDC) and 4 expirations (Q15, X15, G16 and X17).
While trading was quiet, the number of inquiries (to include options), the press coverage, and mentions at conferences all continue to grow. In that order:
- I have traders looking to buy options coverage against 5-10% declines (vs. spot) in California markets for 12-24 months. Some are open to other indices in OTC format.
- Robert Shiller penned a great piece in the NY Times where he noted “Markets without the possibility of making these negative bets will be inefficient. That’s because if it is not possible to short, the smart money can do no more than avoid holding an overpriced asset. Canny traders are forced to sit on the sidelines, and watch in futility as prices decline as they expected. Without short-sellers, there is nothing to stop a group of ignorant investors — who get some ill-conceived idea that a certain investment is just terrific — from bidding up prices to extravagant levels. In the housing market, that poses an enormous problem.” No surprise, he advocates the need for a futures market in home prices.
- At the recent Core Logic conference both Dr. Shiller and Core Logic Deputy Chief Economist Sam Khater used CME futures as an indication of forward price sentiment.
So, while volume remains low, and there don’t seem to be too many traders tweaking quotes, the conditions remain great for trading to take off. Bid/ask spreads are tight, there is growing debate about if/when HPA will decline (or if SFR is in a bubble), and prominent industry experts are raising awareness of the existence of, and potential use for, the CME S&P Case Shiller futures.
As always, feel free to contact me (email@example.com) if you have any questions about this report or any aspect of hedging home prices.