I have not received many inquiries on the MIA (Miami) set of Case Shiller futures contracts, and there is zero open interest, so I thought I’d give the MIA index and contracts one day in the spotlight to prompt some possible comments or trading ideas.
Without trades, or even many inquiries from third parties, it’s more challenging to quote MIA contracts. What does make market making somewhat viable is that, over recent history, changes to the MIA index levels have been in line with those of the HCI (10-city) index. (See graph). (Note -indices on all ten of the Case Shiller regional contracts traded on the CME have been very highly correlated with the 10-city index since Jan 2011. MIA, in fact has the second lowest correlation (ahead of LAV) of ~75%).
YOY gains in the MIA index have been lower versus the CS 10-city index over the last year so absent futures differences*, I’ve just been quoting the MIA contracts as weaker versions of the 10-city index contract. As noted in the table, the differences in closing prices on forward MIA contracts (to the far right, in yellow) are consistent with slightly lower changes than those observed on the HCI contracts.
However, my asterisk on the phrase “absent future differences” is to highlight that there may be (at least) four factors weighing down on MIA prices that might suggest even lower YOY forward gains (HPA?) are appropriate.
The four factors (all teed up with links for your more detailed consideration, and to prompt discussion) include:
Overvaluation -The most recent CoreLogic HPI/Valuation Report notes that “Miami metro tops our list of most overvalued” (markets).
AirBNB -a recent CNBC report (later highlighted by Real Estate Investing Today) detailed how Miami Beach is cracking down on short term rentals (e.g. AirBNB). While there may be public housing policy interests related to affordability, various academics have noted that introduction of AirBnB-type rentals has tended to increase home prices. (See “Do Airbnb properties affect house prices?” (Shepard/ Udell -Jan 2018) as one example.)
Eliminating Dirty Money -A Miami Herald article in May 2018 noted how the Treasury Department was cleaning out the dirty money in Miami real estate. Anecdotes of shell company buyers paying cash for newly constructed luxury condos, and thereby driving up the value of other Miami home prices (as Case Shiller doesn’t capture first-time sales), have long been part of the Miami Beach real estate lore. (Note that the Economist recently called for the City of London to do the same).
Climate Change –Miami Agent Magazine reported in Jan 2018 (highlighting a Union of Concerned Scientists report) that Miami Beach is “the most at-risk city for sea-level rise in the country”. (This may have something to do with “global warming” or what State of Florida officials have to might refer to as “atmospheric re-employment” for fear of punishment. BTW- the two-minute video highlights some excellent verbal gymnastics.)
Given the four factors, I’d be even more inclined to take the short side of any trade involving MIA contracts (e.g. outright trades, calendar spreads, shorting calls, intercity spreads). While I appreciate that all of this news is already in the public domain, it’s been argued that home prices (and maybe home price futures?) tend to react less immediately to new information.
Any longer-term MIA bulls out there, or potential buyers at lower levels?
Feel free to contact me (firstname.lastname@example.org) if you have any questions on this blog, or on any aspect of hedging home price indices.