Impact of “neutering” of mortgage deduction on home prices. A trading opportunity?

The Wall Street Journal had an article Tuesday morning (see link) titled “Mortgage Break Faces Irrelevancy” which outlined possible impacts from proposed tax changes.  The author (Laura Kusisto) quoted several sources each of whom suggested that, under the current proposal, fewer taxpayers would be able to take advantage of the mortgage interest deduction, as they would find defaulting to use of the standard deduction (which might double) more attractive.   (See WSJ illustration below graphically depicting projected changes in use of standard deduction across selected regions.)   Based on that premise (and assuming that deduction of state and local taxes were also abolished), some (not-so-disinterested) parties, such as the National Association of Realtors (NAR), arrived at a forecast that, were the tax changes to be implemented, home prices would fall ~10%.  (See the report the NAR commissioned from PriceWaterhouseCoopers here. )

When people make such outlier forecasts (most housing experts are projecting 4-6% gains in 2018) I like to remind them that the CME Case Shiller futures and options platform provide the best public, pure-play to financially express their views.

To recap the opopportunities for housing bears, or just for those who worry about increased volatility as the tax legislation gets debated, recall that:

  • There are futures contracts on the Case Shiller 10-city index, and ten more for each of the regional components.  Six of the cities highlighted in the WSJ article have CME regional contracts.  (Note 1 –  regional definitions may not overlap. Note 2- transactions referencing other regions could be done in over-the-counter trades.) As such one can view forward prices, or take a position on an index that spans many regions, or, alternatively, if you believe that the high-priced coastal areas (that typically have higher mortgage balances and local real estate taxes) will be hit harder, trade the BOS (Boston), NYM (New York), SFR (San Fran) contracts.
  • There are 11 expirations for each contract to include quarterly contracts that mature in Nov ’18, Feb ’19 and Mar ’19.  Since the contracts cash-settle (much like the S&P 500), contract prices should eventually converge to the index value at settlement.  As such, some argue that, forward prices may incorporate some expectations of forward index levels.
  • The current CUS (10-city index) is 215.50, while the Nov ’18 is quoted 224.0/225.0 (or 3.9/4.4% above spot).  That is, the market is priced for ~4% gains, so if you believe that home prices will fall (conditional on some events) you might expect to see a sharp price decline.  This contract might be a way to express that, or just observe market reactions as proposed tax legislation moves forward.
  • In addition to futures, puts (and calls) can be traded on the CME platform.  Strikes are quoted at 5-point intervals so one might look at the 215, 220, or 225 strikes.  These are options on the futures so while they can be traded, they can only be exercised at expiration (European style).
  • Finally, if a trader thinks volatility will jump higher (or stay low), one can pursue many universal volatility strategies (e.g. buying/selling straddles, strangles, across strike combinations).

Please feel free to contact me ( if you have any questions about this blog, or on the topic of hedging home price risk, or would like to discuss a trade.



What property derivative markets need: buyers of longer expirations/ innovative formats

I sent this letter to participants in the Real Estate Derivative Summit being held in Zurich this week.  While that was a conference focused on commercial real estate derivatives, and primarily focused on Europe, my sense was that there might be overlap between their goals and some of the work I’m trying to foster in US residential derivatives.  I hope that it prompts some ideas for further product development in home-price hedging products.

BTW -If anyone knows of a conference, or organization that is more focused on the use of home price derivatives, please let me know, as I’m happy to present.  I’ve given home price hedging presentations at a couple of universities, and would be eager to do so again, or for an industry group.

As always, if you’d care to discuss this blog, or any aspect of hedging home prices further, please feel free to contact me (

Thanks,  John


Toward better balance in housing derivative contracts?

A critical issue impacting liquidity, and/or clearing levels, in the CME S&P Case Shiller home price index contracts, (or I’d imagine any other real-estate derivative contract), is the relative dearth of inquiries from buyers of longer-dated contracts.  Front- contracts (i.e. those expiring within 6 months) get good attention from both buyers and sellers, as traders seem to have strong (and sometimes, opposing) views about short-term index projections.  Bid/ask spreads tend to be much tighter on shorter expirations (given less time for unexpected risks to pop up)[1].  In addition, as contracts cash-settle, there may be no need to unwind.   I get many inquiries for hedgers (to include builders) exploring sales of Intermediate (1-2 year expirations) and even longer-dated contracts (> 2 years), but very few “buy” inquiries beyond 1-2 years.

As such, I’ve observed that implied forward HPAs, based on mid-market levels for longer-dated contracts, tend to fall below many forecasts and survey results[2].  (More on why this may be the case in a future blog.)

There may be several reasons for this pricing, and in the end, possibly some opportunities for new products.

Key support for long-dated bids should come from natural longs, but many question “who might be the natural longs for this contract”.  I would submit that answering this question, and creating products that appeal to this audience, may be the keys to building volume in housing (and other real estate) derivatives.  One can tweak derivative contracts with contract nits, but enticing natural longs to participate is the key to growing this market.

(The one technical issue that has dissuaded some longs, is that CME futures settle on the index at some future date.  Thus, if as today, and as seen in the SFR diagram, forward prices are higher than spot, one can’t buy futures-at today’s spot levels -because “the market” expects index levels to rise in the future.  For the last five years, forward prices already have some rise priced in to them.  Instead, to profit, a buyer must see a settlement price above their entry point (so a gain versus today’s “expectations”).[3]

While the natural shorts, which are anyone negatively impacted by a decline in home prices (e.g. home owners, banks, RMBS deals, MI companies) see futures and options (and OTC products) as a hedge, the natural longs (which I’d describe as anyone negatively impacted should home prices rise) are not the entities one typically associates with futures contracts.

For example, much has been made about the Millennials delaying their transition from renters to home-owners, all while seeing home prices get away from them in the hot cities of San Fran, Seattle and Boston.  As seen in the above chart (to the left), a buyer (in Dec 2016) of the Nov ’18 contract in the SFR contracts would have seen gains on those contracts, somewhat offsetting the rise in their dream house[4].  Note, however, that some contracts (e.g. CHI, not shown) saw prices fall.

For other areas (e.g. Seattle) where there is no CME contract) one would need enter an OTC contract.[5]

However, hedging life’s risks with futures contracts is not something that one associates with 25-year old’s.  A home-savings plan product (combining savings + a proven purchase of futures, forward or options) might prove to be a more attractive package.

Another natural long for US home price exposure might be foreigners who don’t own property in the US.  While much as been written of the US market as a shelter for the wealthy looking to shelter capital (e.g. investors from China, Russia and Latin America), those parties may be looking to shield capital, and/or diversify.  Home price appreciation may be a (distant) secondary consideration.  In addition, futures (or forward) contracts don’t require much capital, and futures brokers need to KYC and report activity to regulatory bodies both of which may be at odds with some large residential purchases.

However, there’s a growing world of middle-income investors around the world, who can’t buy entire floors in a Vancouver condo, or scoop up properties in Beverly Hills or Greenwich, who might want some exposure to US home prices (or other “hard” assets, particularly if they believe that nominal real estate price might provide some protection against easy money policies).  For example, if nominal home prices move (somewhat) with inflation, an ETF backed by forward home price contracts, might allow such investors to gain access to a broad exposure to unanticipated gains in US property prices.  With the dollar down, and US home prices lagging those of other countries, an index of dollar-denominated, US home prices in an ETF format might be attractive.[6]

Furthermore, pension accounts now regularly allocate ~5% of their funds to real estate, but with a primary focus on income, and often with 90+% of their allocation to Commercial Real Estate.    However, CRE is probably much more sensitive to interest rates (via CAP valuations) than US home prices, so a shift from CRE to residential might be prudent should an investor be worried about rising rates, while wanting to maintain exposure to real estate.

Also, using futures contracts might be a way for a portfolio manager to quickly ramp up an exposure to an index portfolio, and then reallocate over time as they see opportunities to add value.  Similarly, a PM might be able to “park” exposure in 2-3 year futures – thereby keeping their fund allocation to a certain real estate threshold – while dramatically cutting their credit spread duration.  (i.e. the volatility of a home price futures contract should be lower than that of a 20-year office lease.)

While a common lament is that futures don’t provide the income that pension accounts seek, combining put-writing strategies with Credit-linked notes might be a tool worth exploring.  My sense is that hedgers are more open to buying puts than OTC forwards, so this might a source of even more-motivated supply.

I’d highlight the great success that the GSE’s have had over the last five years in writing credit-protection against the first 1-3% of the loans they’ve guaranteed.  One of the key lesson from the financial crises is that loan losses are correlated with home prices.  As such, a credit linked note that converts put home price put premiums into coupon payments might appeal to the same audience.

In addition, unlike the STACER/CAS programs where different issues are diversified by borrower, but all have about the same geographic exposure, an investor in CLN’s backed by home-index puts could customize their exposure, and/or diversify across the world’s cities.

Net, if you agree that the challenge is in enticing buyer interest to housing derivatives, then repacking the buy side of futures (or the writing side of puts) needs to be a primary focus.  Creative applications of long positions, rather than getting clients to buy outright futures (or options or OTC forwards), is where the solution to better liquidity in housing derivatives lies.

John H Dolan

Oct 9, 2017


[1] See monthly recap at for a summary of month-end bid/ask spreads

[2] E.g. the quarterly Pulsenomics home price expectations survey  See also for an analysis of Pulsenomics survey results.

[3] Note longer-dated contracts were quoted below spot during 2007-09.  See  “Observations on the CME Home Price Futures Market: Were These Futures Able to Predict the Home Price Crash?” (Dolan, Hume -2010)

[4] SFRX18 closed at 238.4 on Dec 31, 2016.  Close for Oct 6, 2017 was 254.2, or 15.6 points. Each contract has value of $250 * index level, so a contract at price of 250 has notional value of $62,500.  Gain of 15.6 points or $3,900 per contract/ on ten contracts (equal to $625k) would be $39,000 in gains on futures.

[5] See Home Prices in the Pacific Northwest – a review of OTC trading for further discussion of OTC issues.

[6] In addition, given how far forward futures settle (e.g. a new Nov ’22 contract will be introduced next month) there may be little need to continuing roll near-settlement contracts.

UBS Outlook -Using Calls, Intercity spreads to express views

UBS just updated their outlook of home price values in major cities around the world.  (You can link here.)  A major first impression is that while some publications question whether US prices are bubbling, the recent gains in home price indices in other countries (and they highlight Toronto and Stockholm) make US markets look asleep by comparison.    I’ve had inquiries from people looking to hedge Toronto, Vancouver and other cities listed in the UBS report.  No surprise, given the recent strength, we ended up far apart on what forward values might be.  Neverthess, I remain open to facilitating an OTC trade.

A secondary observation from the report is the relative strength (and fundamental value) of US cities to each other.   For example, the only “undervalued” city (of the 20 listed) is Chicago, while San Francisco, Los Angeles are “overvalued’ and the cost of housing in New York City (using a different metric), consumes more of a borrower’s income than even those two cities.  (BTW -Boston is also covered, and is shown as “fair-valued”).

Here, the CME contracts may be helpful, should one want to express an opinion, as there are contracts in for each of the five regions (BOS, CHI, LAX, NYM and SFR).  However, be cautious as the Case Shiller indices may not geographically overlap with one’s impressions of inner city markets.  UBS references the local FHFA indices, which are much more narrowly defined than the Case Shiller indices.  Still, it may be fun, or useful to review CME markets in the context of the UBS comments.

The chart below shows the quotes on 11 Nov ’20 CME contracts converted into percentages versus spot levels.  The bottom of the bar represents the bid side, the top the offer, and the hash mark, the mid-market value.  While there may be some challenges in this approach (due to seasonality issues) I would expect that the impact is smaller, the closer one is to the November in the calendar, and the longer the time to expiration).

The chart illustrates that CME market prices are consistent with the most bullish sentiment being with the DEN and LAV contracts (using mid-market levels).   The “overpriced” LAX and SFR contracts cited in the UBS report have greater gains priced into Nov ’20 expirations that NYM and CHI (but only by a hair).  BOS is priced for gains relative to its neighbors in NYM, WDC and even the 10-city index.  So (with the exception of BOS) the contracts seem to be priced along the lines of “what’s rich, will get richer”.

One can trade these contracts outright, but if instead, one wants to express a view on relative values, inter-city spreads are available to trade.

The table to the right is intended to show that two-sided markets exist for all ten combinations of each region versus the 10-city index contract for the Nov’ 20 expiration.  Each quote shows the difference in price points between simultaneously (in the case of the bid side) buying the HCI contract versus selling a regional one.  (BTW- It’s also possible to trade region vs. region, e.g. BOS v NYM or SDG v SFR, but I’ve not shown those here.)

I’ve converted price differences into gains versus spot (the gain on HCI contract vs. HCI spot,  minus the gain on regional contract versus that region’s spot).  The HCI/DEN IC spread is quoted 49 bid (where the bidder would be buying the HCIX20 contract at a 4.9% lower gain in HPA than the DENX20 contract is priced.  On the offered side, the seller is looking to sell the HCIX20 contract with 0.4% lower gain than the DENX20 contract.  Both sides are priced with DEN outperforming HCI.  The market debate is by how much.

Note that in doing IC trades, the parties are bidding/selling contracts with different notional value.   One might consider buying (or selling) more of the smaller (or larger) contract to convert positions into even notional values.   Again, I’d be happy to facilitate.

Finally, while there’s been some trading in puts, buying or selling calls might be another way that a trader might express a view on where they think forward prices are headed.

The table below shows suggested levels on call option contracts for the Nov ’20 expiration on the five of the cities mentioned above (plus the 10-city index contract).  I’ve selected strikes that are about 7% over spot levels as that will make calls close to “at-the-money” relative to futures prices.  I’ve also converted option bids and offers into “% vs. strike” so that premiums can be compared by contract.  One can see that, given all strikes are about 7% over spot levels, and close to that of futures, that I’m implying lower volatilities on some contracts (e.g. BOS, NYM) and higher “vols” on others (most notably SFR).

So, if anyone also believes that SFR is over-valued, one might consider writing calls as SFR has both highest forward prices and highest implied volatility.






Finally, while one can enter electronic orders on the HCI, CHI, LAX and NYM contracts, I’ve highlighted the BOS and SFR contracts as, to my understanding, prices must first be negotiated offline, before trades can be cleared on the CME.  Again, I’m happy to facilitate trades in any of these six contracts, or using other strikes/expirations.

So,  there’s a lot in the UBS report to chew on; their report begs for a platform for trading home price derivatives on values around the world; and there are three different ways to approach trading US values on the CME.

Please feel free to contact me ( if you’d like to discuss any of the points raised here, or if you have a trade in mind.








Sept CME Case Shiller Futures/Options update -27 trades

I just posted a recap of activity during September in the CME Case Shiller home price futures (and options) contracts.    You can find the recap in the Reports section or link here.  The recap cover 27 pages and includes an updated section where information unique to each regional contract (e.g. graphs, prices, volume, open interest, implied HPA and suggested put offering levels) are presented on a separate page for each region.  (See example below).


The highlights of the report include:

–There were 20 futures contracts traded in Sept across 5 regions and 6 expirations on 7 dates.

–Bids and offers generally rose across most regions and expirations (except MIA), particularly after Sept 26 CS #’s.

–Bid/ask spreads tightened dramatically, particularly in longer contracts. However, spreads remain wider-than-normal in front contract (~2pts).

–There were bids in all 121 contracts, and  two-sided quotes in all contracts out to Nov ’18, and then X19 and X20.

–OI remained flat at 45 as several trades appeared to be unwinds.

–For example, close out of SFRX20 open interest led to wtd. avg.  of OI to drop from 1.20 years to 0.92.

–OI remains very concentrated in November expirations (82%).

–There were 7 option trades, again in DENG18.P2000.

Please feel free to review and share (via sending links) the recap.  Feel free to contact me ( to discuss the themes addressed in this report.


Thanks,  John




CME Futures -post Sept release of Case Shiller #’s

Quotes on the CME  Case Shiller home price index futures are marginally higher this afternoon (relative to yesterday, and as measured by mid-market values) after this morning’s release of the Case Shiller indices.  The biggest gain took place in the LAXX18 contract (where there was one trade today).  DENX18 is the only contract that is lower.

Across all contracts, bid/ask spreads average about unchanged.  Bid/ask spreads in the front X17 contract now average 1.9 points.   The CUS (10-city contract) has the tightest spreads.  The SDG/SFR pair has the widest.

Year-on-year price gains in the indices (so ~HPA) were highest in BOS, LAX and SFR (not shown here).  HPA gains slowed slightly DEN.

The largest monthly revision was a downward revision of 0.24 to last month’s LAX index (making today’s increase in HPA more impressive).

Month-to-date volume is 27 contracts with 7 in options and 20 in futures.  There have been trades in 5 regions, and 5 expirations.

Please feel free to contact me ( if you have any questions or trading ideas.

Thanks,  John



Mid-month option update

There’s have been 7 options trades this month (to go with 10 from August).

Here’s a table of my suggested offering labels.  (Note table was updated for current spot values on Sept 21).  Again, given the huge number of potential contracts (combining strikes, expirations, puts and calls) I’m only going to be posting a few live prices (mostly in the HCI-10 city index contracts).  Also, note that while I’ve generated quotes via a model for this table, actual prices might vary.

Finally, note that these quotes are for relatively short-term, slightly out-of-the-money strikes.  Other expirations and strikes are possible (as well as calls.)

Feel free to contact me ( if you have a question or trading axe.

Thanks,  John


LAV -Last contract without OI

It seems incongruous that the only CME Case Shiller home price index contract that doesn’t have any OI (open interest) is LAV (Las Vegas).  After all LAV is the mecca for placing bets on many events, yet there’s been no “action” on LAV.  One might expect future LAV prices to be debated as: the NFL is moving there, the economy probably has a high beta to changes in the economy,  home prices remain so far below the levels seen at the peak, and environmentalists fret about longer-term water supplies.

The graph below shows forward levels that are consistent with rising (but slowing) HPA.  LAV contract prices have risen since Dec ’15 (orange diamonds) and Dec ’16 (green squares).  I’ve sharpened my pencil to tighten bid/ask spreads (with a focus on X17, X18) to see whether that might prompt a trade.

I’d note that implied YOY % price gains of LAV forward prices are a tad stronger than the CUS 10-city index contract.  For example LAVX18 is quoted 170.2/172.2 or 4.8/6.1% above spot levels while the CUS contract is 222.4/224.2 or 4.0/4.8% above spot.  There is an intercity spread market for CUS/LAVX18 that might be worth exploring, if someone would like to make a relative value statement.  I’m also open to hearing any thoughts on calendar spreads (e.g. X18 vs. longer dated contracts) if someone would like to debate the pace of HPA in future years.

Since OI=0, I don’t have any ax in LAV, other than to present a list of contracts where every region has OI.  I could use your help on LAV.

Feel free to contact me ( if you have any questions about this blog or any other aspect of hedging home prices.






Using DEN G18 puts to illustrate options

I recently did a trade in DEN.G18.P2000 (that is, puts on the Feb ’18 DEN contract with a strike of 200.  Here’s a graph that shows the P&L of the trade, were one to sell (write) those options at a price of 4.0.

I think that this is a useful exercise to review as while there may be many more natural hedgers (i.e. buyers of puts), this market would benefit from better two-way flow.  As such, I’m illustrating a way that a put writer might look at this trade with the hope of building some put-writing interest.

To recap, the DENG18 market this morning is 201.0-203.8, so the mid-market is 202.4 (as noted in the blue horizontal line).   The numbers along the primary horizontal axis are the index values at settlement.  The brown line shows that, if one wrote puts at 4.0, and if the settlement in Feb ’18 was higher than 200.0, there would be a profit of 4.0 points (ignoring as fees your broker might charge), but that profit would decline 1:1 for every point below 200.

The second horizontal axis (on top) lays out what each of the individual prices on the primary horizontal axis would translate into on a percentage changes versus the Case Shiller DEN index released in Aug 2016.  (I’m using the most recent Aug 2016 value, which may have been updated from the one originally released in Aug 20016).  Note also that I’m using YOY differences to reduce seasonality issues.

While the most recent YOY gain in the DEN index was ~7.6%, that gain, and HPA for all indices has been falling, and, futures market prices across many contracts are consistent with even further declines.

While a put buyer may have many reasons for buying a put (e.g. hedging real estate development, or a property that they are looking to flip, or to give their lender comfort that tail risks have been addressed, or a more bearish outlook) a put writer needs to form their own opinion of the risk-reward of this pay-off, and how such a new position might fit into their own outlook, all in the context of whether they expect to trade the position or hold until expiration.  (Note that this graph only shows price ranges of ~189 to ~208.  The risks increase should prices fall below 189, but the reward doesn’t increase above 208. Note also that this put is relatively short.)

I’m currently open to buying 5 lots at a price of 4.0 (or sell 5 lots at 5.0) should anyone want to sell.

Recall that while some CME option contracts can be electronically quoted and traded (e.g. all the CUS, CHI, LAX and NYM options), trades in some other regions first need to be agreed to off-exchange and then cleared on the CME.  That is, if someone wanted to trade a MIA option, the two sides would need to arrange the trade.  (That’s where I can help any party looking to take an exposure in another option, whether put or call).   However, since there any already been a trade in this particular region, strike and expiration, the DEN.G18.P2000 contract can be traded electronically. (There may be few futures brokers that will accommodate such a trade.  Please contact me if you need the name of one that will.)

Please feel free to contact me on this trade (, or any other aspect of hedging home prices.

Thanks,  John


Recap of Summer 2017 activity posted

I’ve just posted a recap of CME activity in the Case Shiller futures and option for July and August.  You can find in the Reports section of link here.

This is a short review of a much longer time period as I spent much of August on vacation, to include hiking (Switzerland) often away from WiFi.  I cleared my head, and now I’d like to focus on these contracts -and other forms of hedging home prices.

This recap is shorter than most, but still includes pages covering quotes, market moves, and activity.  I’ll amend with missing pages over time as I blog about key points (e.g. options).

The summary highlights of the recap include:

–There were trade in 6 futures contracts in July, 18 in August,  and 10 option contracts.

–OI slipped to 45 as 16 Aug ’17 contracts expired. OI remains very front-loaded (1.26 years, average-to-expiration) and remains concentrated in the November expiration cycle (87%).

–Bids and offers were generally lower but rose in SDG and SFR.

–Bid/ask spreads (on contracts that had two-sided markets on both June 30 and Sept 5) were about unchanged, but with mixed results across regions and expirations.

– Two-sided quotes are now available in Nov ’19.

Feel free to contact me ( if you have any trade ideas, or axes.



CME Reaction to July release of Case Shiller #’s

Quotes on the CME home price index futures were generally lower this morning (relative to last Friday) after the monthly release of the Case Shiller indices.  The table below shows bids, offers and mid-market levels for the 11 Nov ’17 contracts.  The mid-market values for the BOS, NYM and SFR contracts were all lower by more than one point by the close.  (This despite the large upward revision to last month’s NYM index.)   The CHI and LAV contract were the only two mid-market values that were higher after the news.

The only trade today was two lots in the SFRX17 at 241.4.  Note that 1) that there was an offer to sell more through the close, and 2) that the offer (and trade price) was lower than the bid on Friday.

Activity has been quiet during July with only a total of four trades.  Bid/ask spreads are <= 2.0 on all Aug ’17 contracts.

Please feel free to contact me ( if you have any questions or trade ideas.

Thanks,  John