Basics – Hedging with Home Price Futures, FAQs

Most recently edited March 2, 2016

I’ve been receiving an increasing number of inquiries from people who, probably for the first time in a few years, (maybe given what’s going on in the stock market) want to explore hedging.

I’d encourage you to read both the  Case Shiller Futures -Introduction, and the Case Shiller index methodology (both in the Reports section).   In the meantime here are answers to some FAQs.

  • You found the right person.  I am the market maker for the CME S&P Case Shiller futures  program. (5+ years now). For the last few years I have posted many of the quotes, have been a party to many of the trades, and have much of the (limited) open interest.  I’m eager to rejuvenate trading in housing derivatives and am willing to spend time answering your questions and getting you up to speed.  Feel free to contact me at johnhdolan@homepricefutures.com
  • Volume and open interest (OI) on futures have been VERY low (in many contracts, zero).  (See Reports page for most recent monthly recap with pages for volume and OI).  I agree (in anticipation of your question) that there should be greater usage of home price derivatives.  I hope to dust off a past blog/LinkedIn post/ as to some of criticisms I’ve heard over the last year.  One reason that seems to have gone away, is that (as mentioned above) people feel the need to hedge (that they didn’t in the rising markets of the last few years.)
  • There are other “retail” programs that allow a homeowner to hedge home price risk.  (Check out www.valueinsured.com for one example).  I’d be happy to discuss such programs, but you, the user, will need to determine whether CME futures, options, or another program is most suitable for your needs.
  • You’ll need a brokerage account that allows trading in housing futures  and/or options.  Many firms don’t support the products as volume and open interest are very low.  Interactive Brokers has a good platform for futures, but there are others.   Insignia Futures allows option trades.   I’m happy to provide contact info. If your broker does allow trading in housing futures, let me know as I’d be happy to support their efforts.
  • That brokerage firm will determine suitability and margins (the CME sets minimum margins that firms can add to).
    • Margins tend to run about 5% of the notional value of a contract, but vary by region.
  • While you might contact me to discuss, or propose a trade (see below) know that your counterparty on any CME exchange-traded trade will be the CME.  OTC contracts are another issue.
  • FUTURES
  • Futures prices settle at the value of the reference index at settlement.  As such, they may not move will spot levels, but should converge to spot levels by settlement. (See Feb 20, 23 blogs)
  • There are futures contracts on the Case Shiller 10-city index for each of the ten regional components (BOS, CHI, DEN, LAV, LAX, MIA, NYM, SDG, SFR, and WDC)
    • Some trading platforms refer to the 10-city index contract by “CUS”, others by “HCI”.
    • Quotes are available on Bloomberg and YahooFinance.
  • There are 11 expirations for each region.  Today those are (May 16, Aug 16, Nov 16, Feb 17, May 17, Aug 17, Nov 17, May 18, Nov 18, Nov 19, Nov 20)
  • The Case Shiller indices constitute broad geographic areas.  Forward home prices may diverge to varying degrees within a region.  Some local regions are correlated, but not with a factor of 1.0 (something to think about when hedging).
  • Beyond that please appreciate that there is also a risk (“basis risk”) between the price performance of your house and that of an index.  There is no hedge to overpaying for a house.
  • Realize that futures prices have been quoted at higher than spot levels since about 2010.  That is, the futures price already reflects some “expected” gains vs. spot indices.  (Yes, the opposite was true in 2009 – i.e. forward prices were lower than spot).
  • For example, (with higher forward) prices, one shouldn’t buy futures because they expect the spot index to rise.  Some rise has already been priced in.
  • Conversely, if one expects the spot index to be lower at a future expiration, one should appreciate that the futures prices are above today’s spot levels.  As such, even if spot levels end up unchanged at expiration, one would have a profit if they sold contracts earlier, when at a premium.
  • Futures prices change -just like other markets.  For example the SFRX17 contract was quoted 235.2/238.6 (bid/ask) on Dec. 31.  It was quoted 231.0/236.0 in early Jan.
  • Re: Trade execution
  • Futures have notional value of $250/point.  So a contract trading at 200.0 represent $50,000 of notional exposure.
  • A 1 point  move on one contract = $250.  A 0.2 move (the minimum tick)  = $50.
  • I strongly suggest that you don’t use market orders as you might find a sale being executed at lower that posted levels.  Use limit orders.  I typically only post 1×1 markets (one lot bid/one lot offered), so there may not be much depth behind quote.  Please feel free to contact me if you have a particular region/expiration in mind.  I have been willing to post quotes for higher amounts, or inside quoted markets in the recent past.  Feel free to post your own quotes
  • I often post quotes in 60+ of the shorter expiration contracts (out of the total possible 121 -11 regions (times) 11 expirations).
  • Bid/ask spreads tend to widen as time to expiration increases.  As such, I have not felt compelled to quote markets in many of the expirations beyond May 2018 (except the CUS 10-city index series.)
  • OPTIONS
  • While options are possible, I’m not aware of any recent trades (a/o Feb 29, 2016).   I’ve posted separate blogs on options but I’d highlight:
    • There are four regions where options (both puts and calls) can be traded electronically (CUS, CHI, LAX and NYM)
    • Trading in other regions is possible (if done “ex-pit” in minimum 20-lot orders)
    • Options are on the futures contracts, not the spot index
    • Given the permutations of regions, expirations, strikes, and puts/calls, I’ve chosen to react to inquiries rather than post multiple levels.  While much of my recent focus has been on LAXX17 230 puts, I’d note that there is a 4.0/6.0 market today (Jan 21) in HCIX17 200 puts.
  • OTHER INDICES, OTC TRADES
  • From time to time  I get inquires for traders looking to hedge using other indices (e.g. NYC Case Shiller condo index), or other more-narrowly defined regions, using either forwards or options.  I am not aware of any such exchange-traded products so any trade would be OTC (over-the-counter).   While I’m VERY open to discussing this topic, the issue of counterparty risk is one that will need to be addressed.  Net, not impossible, but contact me (rather then detail here).

I’ll update this list as I get more inquiries.  Again, feel free to fire away with questions.  If you are uncertain about something: a) the time to ask is before a trade, and b) other’s might also have the same uncertainty.  Your question will likely be added to the FAQs.