An excellent piece of research by Paragon RE on the San Francisco housing market and a tweet by one of my favorite journalists (Mike Rosenberg at the Seattle Times -see tweet here ) prompted me to air the idea of using the SFR (San Francisco area) Case Shiller home price futures as a potential hedge against runaway home prices in San Francisco, for those on the sidelines watching 10% year-on-year gains.
To recap, futures allow a user to lock in a price (long or short) on a contract that will settle on the Case Shiller SFR index value at some point in the future. While there has been near no volume, there have been a few trades over the last few weeks in the longest-dated SFR contract (the X22 contract that expires in Nov 2022). Today, that market was quoted 287.0/290.0, and the spot index for the Case Shiller SFR index is 264.29. (Contract notional values are $250* point, so ~ $72,000/contract at 288.) Such pricing may be informative -if only to viewers/not traders -as the contracts “cash settle” on the SFR index value in Nov 2022. That is, purely as an illustration, if someone bought a contract at 290, and the index settled in (Nov 2022) at 300 (about 13.3% gain over 4+ years) the buyer would have gained $2,500/contract (before any fees). If index levels were unchanged (i.e. at 264.29) at expiration, a seller at 287 would get about $5,750. (Note that there may be many reasons why people buy/sell and contract prices might vary substantially prior to settlement- beyond even these examples, but eventually -as contract expiration approaches -they must converge.)
I share the illustration not to encourage speculation, but to note to viewers, that the quotes are not merely opinions, or forecasts based on past history, but levels were users are willing to back up their exposure with money. While SFR prices have been screaming higher, these CME prices are consistent with continued home price gains, but at a slowing rate.
Futures (despite some negative press) may be useful tools for investors to consider if have more or less exposure to the commodity (in this case San Francisco home prices) than they care. While much as been written about homeowners looking for ideas to protect against a decline in home prices, those looking to buy homes in the future might also consider looking at futures if they want to add to their San Francisco exposure today.
Bids on the SFRX22 (Nov 2022 expiration) contract are consistent with gains of 8.6% (cumulative over the next 4+ years) while the offer is consistent with gains of 9.7%. Someone expecting, or fearful of, or negatively exposed to, 6-10% gains in home prices across San Francisco over the next few years (so 25-40% gains over 4+ years), might consider learning more about these futures. As an example, someone in Dec 2016 looking to buy in San Fran in Nov 2018, could’ve bought SFRX18 (Nov 2018 expiration) contracts at 241.2. The gains from a purchase of those contracts (which today were bid 270.6) would have offset a portion of higher prices they now face. A future buyer of a home in San Francisco, might be able to reduce some of the risk of prices running up 10+% for the next few years, with prudent hedging.
Now there are number of qualifiers (that include more than these) that this is now financial advice, that you should talk to your own broker about any decisions involving futures, that the markets are very thinly traded (so don’t use market orders), that markets may be volatile, and/or not even quoted in the future. That said, anyone looking to learn more should feel free to review the material in the Reports section on this website, or contact me (firstname.lastname@example.org) if they have any questions on these products, or if they’re interested in trading.