Miami -Four factors to consider

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 (johnhdolan@homepricefutures.com) if you have any questions on this blog, or on any aspect of hedging home price indices.

Thanks, John

 

 

 

CME quotes show differences between 2006-08, today

Laura Kusisto challenged home price bears in a thoughtful WSJ piece a few days ago called  Housing Market Positioned for a Gentler Slowdown Than in 2007.

Let me offer my two cents (and agree, for the moment) by showing how different Case Shiller home price futures look today versus the 2006-08 period.

The graphs below show:

  • A graph of closes for the Nov 2006, Nov 2007 and Nov 2008 CUS (10-city index) futures from May 2006 to Nov. 2008.  There is also a black line for the Case Shiller 10-city index.  (This was prepared for my one academic paper on this subject.   Copies available upon request.)  Note that the Nov 2006 contract was just below the Case Shiller index for the six months before expiration -even as the Case Shiller NSA index continued to rise.  The Nov 2007 contract closed below the Case Shiller index for an entire year.  (In those days, only one-year contracts were available so we only have a year of this contract vs. index comparison.)  Finally, the Nov 2008 contract closed at deep discounts to then current index values throughout 2008.  It seems plausible that traders of the contracts (which recall would settle on a forward value) may have been channeling expectations of a declining Case Shiller index (which recall looks backwards to a 3-month moving average) into lower clearing levels (among other reasons for buying/selling).
  • By contrast, as shown in the lower graph, contract closes for the Nov ’18, ’19 and ’20 contracts have been above index levels (again shown in black) as traders may believe index values will be higher by expiration (again with the same qualifier that traders have lots of reasons to buy/sell beyond long-term expectations).  Further, and importantly until very recently, contract prices have been rising, consistent with the possibility that traders were getting more bullish on forward expectations throughout late 2017/early 2018, as monthly Case Shiller releases surprised on the upside (a topic that I’ve written about in recent blogs in  May and June 2018 .

Given today’s graphs, it seems overly bearish, or premature, to equate today’s home price markets with 2007-08.  There may be bigger troubles ahead (similar to how some home price forecasters in 2005 were later proved correct) but at this point, such sentiment doesn’t seem to be showing in CME prices, or (to Laura’s point), this cycle may not be as severe as 2007-09.

 

Two important caveats:

  • I’d begin to worry more if futures prices continued their recent compression down to spot levels, and particularly if they began to trade at a discount.  I’ve touted in past blogs how longer-dated contracts (which, again didn’t exist in 2007) tend to have magnified reactions.  Best to keep an eye on calendar spread quotes, or premiums of longer-dated contracts to spot for signs of distress.  As shown from the 2006 period, were Case Shiller index levels to eventually turn down, it will likely show in futures trading at a discount to spot first as traders sell forward contracts.
  • The volume in today’s CME contracts is <10% that of 2007.  That means that markets are not deep and that price levels might change on small order imbalances.  While hedging home price risk over the last few years of a rising home price market did not likely add to profits, I am getting a growing number of inquiries for people more interested in hedging.  With over 100% gains from the bottom in 2012 on some markets (e.g. SFR index was 124.64 in 2012, and is now 268.34), I might expect hedgers to not worry about capturing the last point.  This combination of thin markets and a possible built-up desire to hedge large gains may contribute to contract volatility should fundamental home price news worsen.

Feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss this blog or any aspect of hedging home price indices.

Thanks,

John

 

A longer persepctive -“MBA conference attendees, welcome to DC!”

While Thursday’s blog focused on the more recent markdown in CME home price futures as the stock market fell, with the Mortgage Bankers Association meeting starting this weekend in DC (my new home), I thought that I’d give attendees one comprehensive table, covering a longer timeframe, to chew on.

The table below shows quotes (bid, ask, and close) on the HCI/Case Shiller 10-city index contracts that are traded on the CME (with prices for Oct 12 and June 29th).  There are contracts expiring at 11 different dates ranging from Nov 2018 out to Nov 2022.  (I’ve also added -in orange -values for the Case Shiller index for the preceding seven quarters).   Since the contracts “cash-settle” on the Case Shiller index value released in the expiration month (on the last Tuesday), some have argued that contract prices might incorporate expectations of future home price index levels, as at least one component.

A few notes:

  1. Closes are higher on longer expirations, consistent with further increases in index values.
  2. Closes from June have fallen, and the biggest declines have been in longer-dated contracts.
  3. The percentage difference between year-on-year closes are consistent with HPAs declining over time.  (See middle yellow column.)  Note that recent YOY (HPA) gains of >6% begin to tail off in early 2019, before dropping sharply into 2020 and beyond.

Now three key qualifiers:

  1. There has been near no volume on these contracts, but all bids and offers were actionable, so any traders who were more bullish/bearish that quotes could have acted on them,
  2. There may be many reasons for trades to buy/sell beyond expectations, however, as settlement approaches, index values and contract levels should converge, and
  3. I offer no rationale for why prices have, or should change.  I’ll leave that to the conference panels.

I am happy to provide the same analysis for anyone looking for such on any of the ten regional contracts (BOS, CHI, DEN, LAV, LAX, MIA, NYM, SDG, SFR and WDC).

Please feel free to contact me (johnhdolan@homepricefutures.com)  if you have any questions about this blog or any aspect of hedging home price index risk.  I’d be happy to meet at the conference for anyone looking for more detail on how one might use/interpret these contracts.

Thanks,

John

CME Case Shiller price moves during stock market selloff

Quotes on the CME Case Shiller home price index futures have been moving lower since month-end, and most notably somewhat in sync with the selloff in the stock market over the last two days.  The price moves for the first two weeks of October have been larger than any monthly move in recent memory (hence this post).

The tables below show changes to individual the HCI (10-city index) contracts, as well as summaries for the price moves across regions and expirations.  Note that the last two series don’t tie out as the far right column only tallies price changes on contracts where there are two-sided markets.  A set of the changes for all 11 regions is included in the Reports section, or you can access here. 

At a high level, prices are lower across all regions, and for all expirations (except Nov ’18, which measures activity through Sept 30), with the biggest declines in longer-dated contracts.  Such price moves are consistent with declining HPA (as early as the K19 contracts).  Some longer-dated calendar spreads are now bid flat (i.e. the next contract would be bid at the level of the earlier one) and I could see selling interest taking X22 contracts negative.

Price declines have been biggest in the California contracts (LAX, SDG and SFR).  Bid/ask spreads have not widened as much as in the past, as third parties have been posting (a limited number) of bids and offers.   Third party activity remains focused on the LAV, LAX and SFR contracts.

Other than a series of trades in the (soon-to-be) expiring SFRX18 contract, there have been no trades, but several tight selected markets.

With the stock market selloff, rise in VIX by >50%, and the price moves here, my offering levels on puts has jumped (as higher volatility, lower forward prices, and absence of third-party buyers demand additional caution.)

 

As with any market disturbance the current re-pricing may present some interesting trading opportunities.   Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss any trading ideas.

Thanks,

John

 

September Recap of CME Case Shiller futures

I’ve posted a recap of (the very limited) activity in the CME Case Shiller home price index futures for September.  You can find the recap in the Reports section, or access here.

(I’ve also updated life-to-date volume and open interest tables.  Both are in the Reports section.)

There was very limited trading in September (partially as I was traveling for two weeks) but prices moved lower -particularly in longer-dated expirations – across all regions (except LAV).  For now, as I note below in the highlights, interest from third parties is concentrated in: front contracts, SFR region, and puts.  As such, I’m going to start this month to shift my focus from posting continual two-sided prices on all (121) contracts to more concentrated focus on those three areas.   I’ll still try to recap all prices in month-end reports.  Of course, anyone can continue to post prices in any contract but best to contact me if you’d like a response to your inquiry.

Month-end highlights include:

–There were 2 futures contracts traded in September –both in SFRX18.

–There were no options trades (but multiple inquiries focused on 9-18 month, slightly out-of-the money strikes.)

–Despite low volume, there is interest from third-parties, primarily in front contracts, across the SFR expirations, and puts.

–Bids and offers were lower across all regions (except LAV and MIA).  Prices for LAX and WDC were down the most.

–Bids and offers were lower across expirations with biggest declines in contracts beyond Nov 2020.

–OI on futures fell from 48 to 47.

–OI has become even more concentrated in Nov expiration cycle with all but 2 of 48 OI in Nov contracts.

-Paris contracts have not begun to trade.  Index representatives will be in the NYC area in mid-November should anyone want to hear more.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price index exposures.

Thanks,  John

 

CME reaction to post Tues Sept 25 CS#’s

Quotes on the CME Case Shiller home price index futures are mixed, and a hair lower, after this morning’s release of Case Shiller numbers.  As illustrated in the table below, prices on the Nov ’19 (X19) BOS and LAX contracts are lower by one point, while the LAV and SFR contracts are higher.  The HCI (10-city contract) is lower by 0.5 reflecting slight declines across the ten regions.  Bid/ask spreads are almost back to pre-CS#’s.

While there have been no trades yet today, (with the turn in HPA) I continue to receive inquires from people looking to buy puts.  (Most inquires are for 1-2 years for slightly out-of-the money strikes).   In my Sept 21 blog I highlighted that options are now easier (for me) to trade across all ten regional contracts.  I have a limited budget for put writing, so anyone looking to sell puts should have some pricing power.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any other aspect of hedging home price indices.

Thanks,  John

 

Puts for all regions

With the help of CME (thank you LA) I’m finally able to post electronic quotes across all ten regions for the Case Shiller home price index contracts.  Now any trader that wants to buy (or sell) one-sided protection against a move in the Case Shiller home price index has a platform that entails: public pricing, standardized terms, fungibility, and the CME as counterparty (via your broker) to all trades.

The table below shows prices (in orange) for ~1-year puts with strikes near spot levels.  I’ve converted premiums into “ask as a % of spot” to somewhat normalize quotes across different strikes.  As intended, puts on the HCI (10-city index) contract have the lowest (relative) premium, while those for SFR have the highest.  (CHI is also high, but primarily as function of relatively low strike).

Note that any strike (with 5-point interval), and any expiration, and both puts and calls, are possible to trade.  I’m showing this small sub-set as many inquiries have been for relatively short-term protection against a move below today’s levels.  ( I hope to blog about higher strike puts next week).

I’m open to entertaining any traditional option trading strategies (e.g. delta-neutral “vol” plays, bear/bull spreads).

Let me know if you need help finding a broker to trade these products as most firms do not (given historically low volume).

Please feel free to contact me if you have any questions about this blog (or topic), or any aspect of hedging home price indices.

Thanks,  John

On vacation next few days/ back at desk on Thursday Sept 20

I’m visiting Italy for the next few days (back Wednesday night).  I’ll have limited access to emails and trading platform, and as such, have widened out some longer-dated bid/ask spreads.  Will pick things up when I return.

Feel free to post questions (johnhdolan@homepricefutures.com) as I’ll have a lot of time on the trip back to compose answers.

Thanks,  John

Credit Linked Notes – High Coupon for taking downside risk on index

Last week I wrote about how one might construct a Principal Protected Put (“PPP”) (thank you PW) to buy protection for a downside move in a home price index, at the cost of foregoing income.  Today, I’d like to highlight the opposite strategy, where one might accrue a higher coupon, at the expense of taking exposure to downside movements in a home price index.  A hypothetical example of the possible resulting payouts (referencing the SFRX20 contract) is shown below.

At a high level, if an investor bought such a CLN, and  if the SFR index was above 270 at expiration in Nov. 2020, the investor would receive 100% of principal back, while earning a coupon that paid 1.3% over a benchmark rate (e.g. Libor in the past).   However if the SFR index was below 270 at expiration (only) then the amount of principal paid back at maturity would decline (as show in the second column from the left).

Further, if an investor preferred a higher coupon, the put could be internally leveraged (in the example to the right) such that the coupon was three times as high, but at the expense of the principal reduction also being 3x as fast, should the SFR index be below 270 at maturity.

Note for this example that the SFR spot index is 268.34, but the SFRX20 contract closed at 285.0.  I’ve picked a 270 strike for the puts as it’s close to the SFR spot level, but >5% out-of-the-money on the SFRX20 contract.  (Many credit note investors prefer a base case -in this instance where the current futures contract price remaining unchanged- where full coupon and principal would be returned at maturity.)   I’ve rounded off the term to 2 years (i.e. as if today were Nov. 30, 2018) to simplify math, and assumed no expenses, or margin calls, all of which are realities that would need to be addressed.   As with the PPP concept, any combination of expiration, and strike is theoretically possible, for any region, with a range of leverage.  Finally, all of the above analysis is predicated on being able to find a party willing to buy the put (from the CLN issuer).  (To save you the math, I’ve assumed a market of 7.0/11.0 for the CME SFRX20 270 puts and that the CLN issuer sells the puts at 7.0).

Again, the point of this example is not to tout or create an actual CLN, but to illustrate the moving parts behind one, and to show a “short put” strategy in a bond-like comparison.

MBS credit investors should be very familiar with the concept as it generally mirrors the structure of the billions of  STACR/CAS bonds that Freddie Mac and FNMA have issued over the last few years.  In fact, I’d argue that such a CLN might be much easier to trade as: a) the underlying reference obligation is publicly traded -so price discovery and hedging is possible, b) the term is only two years (in this example), and c) severity on CLN is known upfront )).  Such a CLN/ index put/ strategy concentrates “credit” exposure to one region, while STACR/CAS bond investors have tail exposure to whatever the weakest MBS credit areas might evolve to be over the much longer lives of those deals.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d care to discuss this blog, options on home price indices, or any other aspect of hedging home price indices.

Thanks,   John

 

 

 

Recap of August activity in CME Case Shiller futures and options

I’ve posted a recap of activity in the CME S&P Case Shiller home price index contracts for August.   You can find it in the Reports section or link here.   The report include graphs, tables, and charts on the 121 home price index contracts (11 regions * 11 expirations).  Readers may view forward curves to observe prices that: 1) are consistent with positive, but declining HPA, and 2) which regions are priced for bigger gains than others.

The summary findings in the report are:

–There were 8 futures contracts traded in August in 3 regions (DEN, NYM and SFR) across 3 expirations, in 3 trades.  One trade (5 SFRX22) was negotiated off-line.  Unusually there was only one lot traded the days just before, or after, the release of Case Shiller #’s.

–There were no options trades (and haven’t been any in almost a year).  I’d like to be responsive to any inquires –puts, calls/ in, out of the money/paired trades -to jump-start trading in options.

–Despite low volume, there is interest from third-parties, primarily in front contracts and across the SFR expirations. The SFRX22 contract was quoted much of the month with <3 point bid/ask spread.

–While bids and offers were generally lower across many regions for August,  BOS, LAV, MIA and WDC all had higher bids.  (Note that 3 of the 4 have no OI so I am trying to “stir the pot”).

–OI on futures rose from 44 to 48.  (OI dropped below 100 in April 2014 and I’ve been trying to claw back to that level).

–OI has become even more concentrated in Nov expiration cycle with all but 2 of 48 OI in Nov contracts.

–Growing interest in “Fractional Interests” and “shared appreciation strategies” leading to more detailed conversation of home price expectations.  I’m planning a mid-Sept blog to detail developments in this area.  Open to contributions.

As a general theme,  there seems to be growing sentiment that HPA gains are slowing (possibly increasing the need for hedging), bid/ask spreads have been contracting, and I’m eager to facilitate retail-sized trades.  Net, a good landscape for growing volume.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog, or any aspect of hedging home price indices.

Thanks, John