2018-Year end Case Shiller values/ See Feb ’19 (G19) CME contracts

The CME Case Shiller home price index futures provide a potentially useful platform for hosting the debate of “how much will home prices rise in 2018”.  That’s because the Feb ’19 contract settles on the Case Shiller index values announced that month, which are the December 2018 values with the (Case Shiller index methodology) lag of 2 months.  Since the contracts cash settle, contracts prices should converge to expectations about those year-end index values.

Note prices can deviate from expectations before settlement for a variety of reasons, with an imbalance of orders, or thinness of market, being two likely reasons.  That said, someone who has a strong view about 2018 home price changes might be able to employ these contracts to take a position on either the Case Shiller 10-city index, or any of the ten regional components.

The graph below shows the bids, offers, and mid-market values for the 11 contracts converted into percent differences versus the respective Case Shiller Dec 2017 index values.  For example, the BOSG19 (Feb ’19) contract was bid 216.6 and offered at 219.4, versus the Dec 2017 value of 204.73.   The bid is 5.8% higher, and the offer is 7.2% above the Dec ’17 index values.  The size of the bar represents the bid/ask spread (in percentage terms), while the height of the bar represents which areas are priced at levels consistent with above-average performance (e.g. LAV and SFR) or below-average performance (e.g. CHI, NYM and WDC).

The table below the graph shows mid-market pricing (bid+ask/2), HPA gains in 2017, and the ratio of 2018 pricing versus 2017 gains.  Note that even though LAV and SFR are priced to have the highest gains for 2018, the implied HPA is lower than 2017.  Similarly, while CHI and WDC are priced at levels consistent with lower than average gains for 2018, that those gains are higher than last year.  Net, regional prices (at least as represented by CME prices) are converging…slightly.

While this chart, and trading in these contracts, may be useful, the big qualifier is that there is no open interest in any of the Feb ’19 contracts (and not much trading in the other expirations).  I’m eager to facilitate any retail-sized inquiries on these contracts to foster debate on the question posed above (i.e. where are home prices headed in 2018?).   Any prognosticators with outlier views (bullish, or bearish) might consider steering their readers here as I can’t think of a better pure play on home price expectations.

Finally, I’d note that while contracts can be traded on an outright basis, the CME allows trading in intercity spreads (a form of relative value trading).  That is, one can, for example, go long NYM and short WDC (or any other permutation) simultaneously at a pre-determined spread.  (See Oct 7, 2017 blog –UBS Outlook- Using Calls, Intercity spreads to express views, or Feb 6, 2013 blog – Intercity Spreads -How to read them, for examples/explanations.

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

Thanks,  John


Recap of CME Case Shiller futures -May 2018

I posted a recap of activity in the CME Case Shiller home price index futures for May that can be found in the Reports section or accessed here.  The report has pages with graphs of prices, tables of price changes and trading volume,  information on calendar and intercity spreads, and quotes on selected options.

The summary points include:

–There were 7 futures contracts traded in May in 2 regions (SFR and WDC) across 4 expirations.  There were no options trades.   (Note that there were 5 trades on June 1 –all in SFR).

–Activity remains slow with most bid/ask activity in the LAV and SFR contracts.

–For May, bids and offers were higher across all regions with much of the move taking place after the CS #’s were released on Tues May 29th.

–Bid/ask spreads were tighter across expirations with most of the tightening occurring in the longer-dated contracts.

–Similar to last month,  the combination of higher bids and tighter bid/ask spreads, continued to raise 1.5-2.5 year implied HPA, albeit from still very low prior levels.

–Some pages (including Calendar spreads) are listed as needing to  be updated on Mon June 4th, when markets are open.

–Bid/ask spreads on the  (new) front contracts (Q18) average 1.7 points at month-end, slightly wider than typical, given one month to expiration.

–OI on futures fell to 35 (as 6 May’18 contracts expired).  OI on options unchanged at 2.  (I’m eager to facilitate trades in zero OI sectors).

–A new home price index futures contract for Paris will be rolled out this fall.

Please feel free to contact me (johnhdolan@homepricefutures.com)  if you have any questions about this recap, these markets, or anything related to the topic of hedging home price indices.

Thanks, John

Today’s Case Shiller #’s vs CME quotes

The quarterly expiration cycle of Case Shiller futures (traded on the CME) may be a useful tool in allowing people to compare what the market expected from home price gains versus actual index gains.   For example (and as highlighted in the following table), the market prices of the SFR (San Fran) contract was 258.0/259.8 on Friday, but today’s index value was 261.8.  Since the contracts settle on the numbers released today (much like the S&P 500 stock index futures), someone who “knew” today’s numbers could have bought contracts at 259.8 and pocketed a 2-point gain (at $250/ point/contract).  Since that didn’t happen, I label today’s SFR index as a “surprise” to the market.  (Note that such surprises work both ways as someone knowing that the NYM index would be 196.97, could have done the opposite in profiting by selling May ”18 contracts at 197.4.)

Net the market was positively “surprised” as in five cases the index values were above the offered side of the market on Friday (with DEN and SFR having larger differences) while in the case of NYM, the market was surprised to the downside.  (Note that the NYM index last month was restated to be 0.33 lower than reported last month, but not enough to account for the outlier nature of today’s NYM index.

No surprise then, that today quotes on the CME futures are slightly higher (despite the large sell-off in the stock market).

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

Thanks,  John

Playing the Amazon HQ2 announcement

Many are waiting for Amazon to announce the location of HQ2, their new second headquarters.  The thinking is that the “winning” city will see home prices soar in anticipation of the need to house thousands of new employees.  While there’s been lots of buzz about what Amazon might do, there’s been little offered in ways to play this announcement.   Calls on CME Case Shiller home price futures might be one tool worth exploring.  (Note that there has been almost no trading in such CME options, but as market maker, I am looking to facilitate -at first by taking the other side – trading inquiries).

The two sets of tables and graphs below show information from the CME Case Shiller contracts on two of the leading candidates: 1) the Boston area, and 2) the Washington DC area.  (Note that both areas are defined in the Case Shiller methodology and may/may not/ incorporate specific locations being considered by Amazon.  However, each may be viewed a generally reflective of home prices for the broader areas of Boston and Washington.)

I’ve added quotes on the futures, as well as indicative offering levels on a variety of call options on those futures (see lower left of each display).

So,  if one thought that home prices in the WDC or BOS area might pop, one might consider buying calls.  I’ve shown contracts for Nov  ’18, ’19 and ’20 expirations (the X18, X19 and X20 contracts) with strikes ranging from  220 to 250.  (Other strikes and expirations are possible).  As with most options, the more time to expiration and/or the lower the strike, the greater the premium.

As an example (and ignoring fees), if one bought a WDC 240 (strike) November 2019 (expiration) call for 4.5 points (at $250/point = $1,125/contract), and the Nov ’19 WDC contract settled at 250, then one would have a 5.5 point profit/contract (equal to 250 settlement price minus 240 strike minus premium of 4.5 points, or $1,375).   While there has been no volume in either call, there also would be nothing limiting a call holder from selling the call before expiration, or hedging with the underlying futures contracts.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price indices.  As noted above I’m very interested in facilitating any inquiries, matching potential buyers and sellers, or in buying calls.






Approaching May ’18 expiration w/convergence => CS (10-city) HPA expectations (6.4%)?

Every quarterly expiration of a CME Case Shiller home price index contract is an opportunity to remind readers about the cash settlement features of these contracts, and how quotes on the expiring contracts might be used to get a sense of “market-implied” HPAs.

For example, the table below shows (in red) the most recent Case Shiller indices for the HCI (10-city index) and for each of the 10 regional components.  Below there is a section that has quotes on the 11 CME home price index contracts.  I’ve average Bid and Ask to create a mid-market level (“Mid”).  Note that all Mid’s are above the current CS index.

Further, I’ve compared the Mid values on the contracts to the index level from a year ago (i.e. from the release dated May 31, 2017) to generate a percentage gain.  If the Case Shiller numbers released on May 29th are close to these Mid levels, then these percent changes should be the year-on-year gains that you’ll read about in press reports that day.  The headline that day should be that the 10-city index rose ~6.4% on the year and that, once again LAV (Las Vegas) will be the best YOY performer and CHI (Chicago) and WDC (Washington, DC) indices will be the laggards.

So (rhetorically) what gives these mid-market values credibility as projections on the upcoming Case Shiller release?  The answer is that the May ’18 contracts will settle on the index values released this month.  So, to pick an example, if someone “knew”, had researched, or just had a strong view that the Case Shiller NYM index for May will be 199.4, they could buy a futures contract at 198.4, and pocket the $250/point/contract difference when the 199.4 number printed.    (Not a bad return for 3 weeks exposure when required margins might be as low as $2500.)  Alternatively, if they believe the actual number , is lower (e.g. the 197.9 mid-market value) they might also try to be the best bid (in case there’s a sale) and bid greater than the current bid of 197.4.

If they were had much more bearish views they could do the opposite, either hitting bids, or offering lower.

The point is that this market allows both bullish and bearish predictions to play out in a (theoretical) way, such that bids and offers should reflect conservative expectations. Buyers will bid where they think that can make money (versus their expectations), while sellers will do the opposite.  Net, bids and offers, when averaged (i.e. to the mid-market levels) should do a reasonable job in revealing market expectations, for such short time frames.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any question about this blog, or any aspect of hedging home price index exposure, or would like to discuss a trade.

Thanks,  John



Indicative one-year put levels

I included a page in the month-end recap with suggested two-sided levels for one-year puts on each of the 11 regional contracts.

The table details on the reference K19 (May 2019) contracts, a strike I selected, and then both suggested levels (in blue) as well as quotes that have been posted on the CME for four contracts.   Finally, the last column is an attempt to somewhat standardize put quotes across a range of strike prices.  Note that the 10-city contract has the lowest, while SFR is the highest.

There are three things to recall.

Recall #1 -that any strike can be used.  I’ve just chosen here to select strikes close to spot levels.

Recall #2 -that I have impediments to posting quotes on 7 of the 11 regions.  In each of those situations, I’d need to arrange a trade off-line before bringing to the exchange to clear.

Recall #3 -while I’ve posted levels for each of the CME listed options, I’m open to structuring puts on any other index.  (See April 27th blog – “What might is cost to hedge Seattle home price risk”.  In fact, I think that the future of home price derivatives is in put options customized across 100’s of indices.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or if you’d care to discuss any aspect (including OTC puts) of hedging home price index risk.





April month-end recap posted

I’ve posted a recap of activity in the CME Case Shiller home price index futures for April.  You can find the recap in the Reports section or view here.

Highlights of the report include:

–There were 9 futures contracts traded in April in 4 regions (HCI, DEN, LAV, and NYM) across 4 expirations.  There were no options trades.

–Activity remains slow with most bid/ask activity in the SFR contracts.

–For April, bids and offers were higher across all regions with much of the move taking place after the CS #’s were released on Tues. April 24th.

–Bid/ask spreads were tighter across expirations with most of the tightening occurring in the K19 through K20 contracts.

–Net the combination of higher bids and tighter bid/ask spreads, raised 1.5-2.5 year implied HPA, albeit from very low prior levels. (My sense is that forward prices are biased lower by an imbalance of hedgers vs. natural longs).

–The front contract (K18) bid/ask spreads average 1.7 points at month-end, slightly wider than typical, given one month to expiration.   California contracts continue to be quoted at the widest b/a.

–OI on futures rose to 40 (from 33).  OI on options unchanged at 2.

–New home price index futures contract for Paris to be rolled out this summer.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this recap, or if you’d like to discuss any aspect of hedging home price index risk.




Get ready for Paris home price index futures!

Eurnonext is preparing to launch a Paris home price index futures contract later this year.  They’ve sent out “Save the Date” notice for a presentation on May 23rd (see below) to discuss the reference index, and other “perspectives and innovations”.  My hope is that this launch will revitalize discussion of the potential benefits of home price hedging, both in Europe and here in the States.

Topics include:

  • Sectorial real estate market review
  • Summary of institutional investor expectations and initiatives launched by Euronext to support investment in the sector
  • Presentation of the new index on the Parisian residential market developed by Compass in partnership with Kalstone and Euronext futures on this index
  • Risk coverage and performance exposure of the real estate sector

I’ve had several conversations with the parties involved and they seemed to have incorporated changes versus the CME Case Shiller methodology.  I believe that the most notable difference is the approach taken by Compass (the index provider) is to create an index with a much smaller geographic range.   While Core Logic has created  Case Shiller-style indices on much smaller areas (see page 39 of CS Methodology in the Reports section), such indices might seem to be somewhat more prone to “signal/noise” issues when home price turnover (or pairs count) is smaller.  I understand that  Compass index, in an effort to provide an index on a smaller geographic area, might trade off the rigor of a pure repeat-sales index, with a blend of repeat-sales and hedonic approaches, to provide a smoother, very local index.

I have more ideas if anyone cares to chat but will wait until Euronext and Compass distribute their methodology and launch calendar, before writing anything here.  (BTW- I’m off to Paris this weekend for some informal due diligence!)

If you have any questions about the May 23rd event, please contact Margot Maurier <MMaurier@euronext.com> , or me (johnhdolan@homepricefutures.com).  I will update this page as I learn more.




What might it cost to hedge Seattle home price risk?

With Seattle being one of the strongest home price markets in the country, some homeowners might be worried about a retreat in prices.  Of course, they might prefer not to sell their homes, uproot their families, and move into a rental for both cost and logistical reasons, just to express a view on home prices.    While there are some products that offer a homeowner the ability to buy protection on the price of their own home (e.g. Value Insured), payouts on such policies , are often structured as insurance and typically require the sale of the house at a loss.  While they might be a better product for a longer-term perspective (and particularly if one is planning to leave the Seattle area when they sell), there may be better alternatives for those that want to stay in their house, and/or have a shorter term horizon.

I’d argue that a put option on a Seattle home price index might be an ideal product.   For those not familiar with financial products, a put gives the owner the right, but not the obligation, for a predetermined, negotiated fee (and no future payments), to sell something at a specified price (“strike”), on some particular item (“reference obligation”) either at some future time, or over some time period.   (Note that a put can be arranged for any time period, or for any strike.)  Puts exist on several financial exchanges for businesses to protect against the sale of key products they produce (e.g. wheat and oil).  Exchange-traded puts for home price indices were launched in 2006.    While puts sounds like (and act similar to) insurance, in that you pay a fee and are partially compensated if something bad happens, puts don’t require a loss on the sale of your house, to monetize a decline in home prices.  Also, unlike most insurance, you can trade the put to another person -although no market currently exists.

While no such exchange-traded product exists for Seattle, there are contracts on the other regions that can be traded on the CME (Chicago Mercantile Exchange).  I am the market maker on those contracts and so will borrow heavily from how those are structured to suggest a template for a Seattle product and what prices I’d quote.

The CME contracts reference the Case Shiller home price indices, so I’ll use the Case Shiller Seattle (NSA*) index here.  The CS indices are probably the oldest, most often cited example of a home price index.  They are updated every month on the last Tuesday by S&P.  This week the index for February was updated to 238.24.  Think of this as meaning that the value of houses has appreciated by 238% since Jan. 2000.   I am open to referencing another index (e.g FHFA or Zillow), or even a sub-section of the Seattle market e.g. an area clearly defined by zip code or neighborhood, but  since I will be making comparisons versus other Case Shiller contracts, for consistency, I will stick with the CS index (*and in particular with the non-seasonally adjusted index.) for this analysis.

The shorter CME contracts expire at quarterly intervals (on a Feb., May, Aug., Nov. cycle) so I’ll use May 2019 as the contract term here (as slightly more than one year).

Further, the CME contracts can be exercised only at expiration, which for May 2019 would be May 28th, 2019, so I’ll use that here (but am open to discussing a contract that could be exercised at any time, but pricing would be higher).

Finally, I’ve highlighted a series of quotes where I’d be open to offer puts on the Seattle CS index for strike prices ranging from 240 to 250 for May 2019.  I’ve denominated these quotes in terms of points versus the Case Shiller index, but also show how such price would be expressed in terms of the spot index.  That is, the premiums for one-year protection would range from 2.87-3.93%.  (Like car and home insurance one can either get more coverage, or reduce the upfront premium by changing the deductible -in this case the strike.)

So for example, the cost of protection to May 2019 on $100,000 of index value struck at 240 would be $2,870.

One additional consideration is that while puts (including CME -listed housing puts) can protect a buyer down to a price of zero, that leaves the put seller (often referred to as the “put writer”) open to catastrophic risks that are better insured by governments (think flood insurance).  As such, I’ve added a maximum payout (or a strike floor) to this exercise, similar to how I would approach put writing in the LAX (Los Angeles) and SFR (San Francisco) contracts, where an historic earthquake might crush home prices.  In this first example I’m using a floor index of 200, or about ~16% below today’s Case Shiller Seattle index.  That would imply a maximum payout, should the index in May 2019 print below 200.0 or~$16,700 on this $100,000 exposure.  (I can only imagine the financial disarray were that to happen.)

As illustrated below, the payout on such a put option would look like those for other products.  That is if the index settled above the strike value a put buyer would lose only their up-front premium, while for every point below the strike the intrinsic value of the put would go up 1:1.  (Puts may go up or down in value prior to expiration, so I’m only showing intrinsic value at expiration for ease of illustration).  (Note- I’ve scaled the graph to illustrate various payouts.  The graph is not centered on what i might considered the most likely scenario.)

I hope that this introduction of puts on the Seattle Case Shiller index serves to prompt discussion on expectations of index levels in the future, the produce structure I’ve outlined, and suggested offering levels.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss any aspect of this blog, or the topic of hedging home price risk.








CME markets post today’s Case Shiller #’s

Quotes on the CME Case Shiller futures moved higher today after this morning’s release of the February Case Shiller indices.  The line “Mid-Mid change” in the table below highlights the change in prices for the 11 contracts (the Case Shiller 10-city index, and one for each of the ten composite regions) for November 2018 expiration.  Note that all contracts are priced higher (versus yesterday’s quotes).  WDC (Washington DC) is the laggard, rising only 0.6 points, while SFR (San Francisco) continues to outperform expectations, gaining 2.6 points.

Bid/ask spreads have widened as I wait for prices to settle down, and for other trades to weigh in.  As typical, the HCI (10-city index) contract has the narrowest bid/ask spread at 1.6 (along with LAV (Las Vegas) and SDG (San Diego)), while (also typically) the SFR contract has the widest bid/ask spread.

Bid/ask spreads on the front K18 contract (May 2018) average 1.5 points across all contracts with no region quoted wider than 2.0 points.

Longer-dated contracts (e.g. 2020 expirations) have seen some third-party activity, resulting in higher bids, and slightly wider calendar spreads (albeit all from very low implied HPA (home price appreciation) levels.

There was one meaningful adjustment to last month’s NYM index value, which makes this month’s gain, more modest than I first thought.

There have been two trades today to go along with six trades yesterday, for a slightly busier period.

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