Revisiting ways to play the impact of a lower “Mortgage Interest Deduction” (MID

I had previously written about possible ways for market participants to play the impact of the prospects to changes in the Mortgage Interest Deduction (MID) in a blog on Oct 21 .    Since this remains a timely topic, I again want to offer two opportunities for fans of the NAR’s (National Assoc. of Realtors) views, on how they might play the pending collapse in home prices in the higher- home price areas that have historically taken advantage of MID.

The first would be to enter either an OTC spread trade, or a total rate-of-return swap (TROR) on the difference between the performance of the Case Shiller 10-city index and the Case Shiller National index over some time frame.  The CS-10 index contains many of the areas with higher-priced homes (e.g. NY, San Fran, Los Angeles) while the National index covers a much wider cross-section of the country that includes many lower-priced homes, where borrowers would presumably be less impacted by a cut in the ceiling in the amount of mortgage debt subject to the MID.  The graphs to the right show the index values for the Case Shiller 10-city, 20-city and National indices (on top) as well as the year-over-year percentage changes in the indices.

Note that while the 10- and 20-city indices did much better in 2013, that the National index has recently been outperforming the 10-city index (i.e. 6.07% vs 5.33% for the last year, as of the October Case Shiller numbers released in Oct.)  I would be open to an OTC trade on the differences between the index levels one-year forward (currently 216.5 on the 10-city index and 195.1 on the National index), or on the difference in percent gains (currently 74 bps) on the YOY gains in the National versus 10-city index.

While the above speaks to possible OTC trades, one can also take a more targeted view (by area) on existing CME products (i.e. Intercity Spreads).  That is, one can “bet” on the performance of a particular regional index versus the Case Shiller 10-city index, if one truly believes that the areas with the highest priced homes will suffer relative price declines with the lowering of the cap on mortgage interest deduction.

The table above lists six regions that have both larger than average home values (using the Zillow ZHVI) as well as having regional CME Case Shiller futures contracts.  (Note that while Zillow and Case Shiller geographic regions are not a perfect overlap, the ZHVI index does a good job of comparing the average prices to their national average.  By any measure these six regions have higher-priced homes.)

In addition to a trader just outright selling the NYMX18 or SFRX18 contracts (X18= Nov 2018), they could also enter into an Intercity Spread trade where they simultaneously buy one contract and sell the other (in this case the CS 10-city index contract -HCI).  This might be a more conservative play than just an outright sale as the end result will be a function of the difference between the two indices referenced in a trade.  These IC contracts are listed where the bid side shows the price difference between where one might buy the HCI contract while selling the regional contract.  So, for example, the -29.6 bid on HCI/SFR-X18, displays the bidder’s willingness to buy the HCIX18 contract at 224.8 while selling the SFRX18 contract at 254.4.

Note that the 224.4 price on the HCIX18 contract is 3.84% above the current spot level (of 216.49) while the SFRX18 price of 254.4 is 4.47% above the SFR spot index of 243.52.    In effect, were one able to execute this IC trade on the bid side, one would be selling the SFRX index (for Nov 2018 settlement) with higher priced gains over the next 13 months, than the HCI index by 63 bps.

(The analysis in blue, shows the relative differences were a buyer to pay the offered side, in this case -28.0 points on the IC spread).

Note that if one were able to buy the IC spread on the bid side, they would be entering the trade at levels where in 5 of the 6 cases, the regional contract would be sold at a level with implied gains, higher than that of the regional contract. (The NYM contract is priced for lower price gains than the 10-city index).

Even if one bought the IC spread on the offered side, they would still be selling the BOS and DEN regional contract with higher priced gains than the HCI contract.

I am open to facilitating inquiries (or trades) on small amounts of such IC spreads to prompt further reaction to the MID debate.  Please feel free to contact me (johnhdolan if you have any questions on this blog or any aspect of hedging home price indices.

Recap of CME Activity in Case Shiller Futures for Oct 2017

I’ve posted a recap to the Reports section of activity in the CME CS futures and options contracts for Oct.  (Click here).   Since there were no option trades during the month (and since it’s already Nov 3) this month’s effort is an abbreviated report that still has 13 pages of tables, graphs, and data that should be of interest to anyone following these contracts).  I’ll post recaps on individual contracts and options next week.

Highlights include:

–There were 9 futures contracts traded in Oct. across 5 regions and 5 expirations, but trading took place on only 2 dates. Oct was one of the quietest trading months over the last few years with other traders only infrequently posting bids and offers.

–Volume of combined futures and options over the last 12 months is 226 contracts (or about $12-13mm in notional value).

–Bids and offers generally rose across most regions and expirations (except SFR and WDC).

–Bid/ask spreads tightened marginally.  Longer-dated contract spreads benefitted from stronger calendar spread bids that pushed up bids on longer-dated 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 Feb ‘19, and then X19 and X20, for most of the month.

–OI increased to 51 futures, and remain constant on options at 17.

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

–There were no option trades in Oct, but I continue to get inquiries on 12-24 month, slightly lower than spot level, puts.  Put writers needed!

Please feel free to contact me ( if you have any questions about the recap, or if you care to discuss any aspect of hedging home price indices.



CME markets quiet after Oct 31 release of Case Shiller #’s.

The CME markets had a quiet reaction to this morning’s release of the Aug Case Shiller numbers.  The table below shows change to the bids, ask and mid-market levels of the 11 Nov ’18 contracts.  The areas highlighted in the row labeled “One day change (mid-mid)” reflect the two contracts that saw the highest gain, in green (LAV and SDG) and the two contracts that had the biggest losses, in red (SFR and WDC).


On balance, contracts prices rose slightly.  Bid/ask spreads have almost returned to yesterday’s levels.

While there were seven trades yesterday, as of 12:30 today, there have been none today.

Feel free to contact me ( if you have any questions on this blog, or any aspect of hedging home price indices.



Eurex Commercial Property Derivatives- lessons to be learned?

Those interested in seeing how other property market derivatives have evolved might it interesting to review the Eurex Property Derivatives Market.  See link.   These contracts are based on the total returns of MSCI-IPD UK Quarterly Indices for individual calendar years.  The contract terms are outlined here.  I’m told that the contracts are CFTC approved and may be traded by US counterparties.

While the contracts are on commercial real estate indices, and the indices reference properties outside the US,  the contract terms might be useful in prompting discussion of how OTC contracts in the US might evolve (whether residential or commercial).   For example, given recent inquires, I can see how there might be demand for a one-year forward hedge on selected areas not covered by the CME (e.g. Seattle, Austin, Houston, Phoenix), or on US commercial real estate derivatives.

While there have been only a handful of trades this year (see link for trade data, open interest) the size of trades has been much more suitable for institutional investors.  For example, open interest at September month-end was 1,266 contracts.  As each contract has notional value of £ 50,000, the total open interest tallies >£ 63mm.

If interested, best to contact Charles Ostroumoff at Arca Propety Management.  Arca is a niche brokerage specializing in matching MSCI-IPD property futures contracts for its institutional clients, and my understanding is that they have brought the two sides together on most of these Eurex contracts.

If anyone has any questions on these Eurex futures contracts, or any question related to hedging home prices (or given this blog, commercial real estate indices), feel free to contact me (






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