April Recap posted

I’ve posted a recap of activity in the CME  Case Shiller futures contracts through April 27.   I realize that it wasn’t quite month-end, but as there no trades on the 28th (although I’d not that there were 7 on May 1!) the April 27 quotes are a good reference point (that I will use for any May recap).  The recap is in the Reports section or you can link to it here.

I had a busy work/travel schedule in April and tended to leave bid/ask spreads wider than normal.  Possibly as a result, activity was quieter than normal.

Here’s the summary observations from the April recap:

  • There were 4 futures contracts traded in April.
  • Futures trades took place across in 3 regions, but only in 2 expirations, and only on 2 dates. As such, I would describe trading as extended periods of quiet with few other traders bidding and offering, with the exception of a few days.
  • OI (Futures) rose to 69 from 66, but volume and OI is becoming more concentrated in the front contract (K17).
  • There were no options trades.
  • Bids were up strongly during the month across most regions.
  • Bid/ask spreads tightened after two months of widening.
  • Longer-dated forward curves remain very flat as I get many more inquiries from hedgers than potential longs (in X19/X20/X21 contracts).

Feel free to contact me (johnhdolan@homepricefutures.com) about this recap or any aspect of CME home price index futures and options.

Thanks,  John




CME Markets Post April Case Shiller #’s

The CME Case Shiller Futures market reacted quietly to this morning’s release of the February numbers.  The MIA and WDC X17 markets are lower (as measured by mid-market values, as of 1 PM ET) from yesterday, primarily as offered levels declined, while SDG and SFR X17 quotes are higher, primarily based on sharper-than-expected gains in those two indices.

It has been a quiet month with limited trading – somewhat due to competition for my time from work, and somewhat the result of one-sided interest (from buyers).  I’ve left bid/ask spreads wider than normal for the last few weeks.  The May ’17 contracts have rallied (I expect as much) on lower inventory levels, larger gains in home prices from other countries, and a desire to lock in home prices before interest rates rise.  All three three themes have been touted by home price analysts and I’d encourage anyone trading the contracts to look for such research.

My hope is that with the May index expiration approaching that two-way interest will resurface in some of the longer-dated contracts, and bid/ask spreads will compress.

There was one WDCK17 trade so far today.

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on these numbers, the CME futures and options, or any form of hedging home price risk.

Trading options in the “new 7” regions

As I noted in previous blogs, the CME has recently made it slightly easier to trade options in the “new 7” regions (BOS, DEN, LAV, MIA, SDG, SFR and WDC).  While it was possible in the past to trade a minimum of 20 lots ex-pit, one can now electronically trade any amount of any put/call, strike, and expiration in these regions.  However, while the broker I use (Insignia) is able to enter electronic orders for the four original regions (CUS, CHI, LAX, and NYM) such that those quotes can be seen on pricing vendors (e.g. Bloomberg), they are only able to post quotes electronically after a trade has been agreed to by the two parties off-exchange.

While this appears to be a different treatment of options trading, it seems consistent with how market makers approach other markets.  For example,  a market maker in the Eurex property derivatives stands ready to propose bids and offers, but don’t seem to post active markets (at least in the size that clients have been typically interested in trading).  Furthermore, the tally of all CME Case Shiller put/call, strike/expiration/ combinations is in excess of 1,000.  Posting actionable quotes in such a wide array of possible trades would require much more capital, technology, and time (all while taking on greater risk exposure) than I am willing to allocate.

So, while I’m open to responding to reader inquiries on possible option quotes, and while I’m happy to post those here (unless your broker can figure a way to get them posted on the CME), I’m going to periodically throw a few quotes against the wall to see if I can stimulate discussion, and/or possible trading interest.

Here’s the table from the month-end recap that I used to try and prompt debate on relatively, short-term, puts, with strikes near the spot index.  Again recall (or note for first-time readers) that the CME options reference the Case Shiller futures contracts, and are only exercisable at maturity (so European style).  Of course, the contracts are trade-able, and in my one experience with the DEN.K17.P1800 puts, once listed (for the original trade), allow for electronic posting of subsequent bids and offers.

The table lists quotes from month-end to include the referenced futures (the Feb ’18/G18) and quotes on puts with the listed strikes.   Since the strikes cover a wide range, I’ve tried to normalize the put quotes by converting offered levels into a “% spot”.   In doing so, one can see that quotes on the CUS-10 city index are the lowest, while offers on the recently more bullish, or volatile contracts (e.g. CHI, DEN, SDG and SFR) are relatively higher.

I’m open to discussion on these outright values, trade proposals involving combinations (either one option with another, or an option/futures combination), or on other expirations.  Feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to tout or propose an options strategy. I’m willing to look at the other side, and/or to let others know via social media.


March recap posted

I posted a recap of activity in the CME Case Shiller home price index contracts for March in the Reports section (or you can link here).

The key observations include:

–There were 13 futures and 6 option contracts traded in March.

–Futures trades were concentrated in 5 regions, but only in 2 expirations (with 12 in K17), and across 3 dates.   As such, I would describe trading as extended periods of quiet with few other traders bidding and offering, with the exception of a few days.

–OI (Futures) rose to 66 from 54, but volume and OI is becoming more concentrated in the front contract (K17).  (Note increase in OI of 12 when there were only 13 trades suggests new longs and shorts, instead of unwinds.)

–There was one option trade of 6 lots –done under the new protocol (See below, and on options page).

–Bids and offers on futures were up strongly during the month

–Bid/ask spreads were much wider, primarily in front 4-5 expirations.

–Forward curves stopped flattening as California hedgers went quiet.

–I’ve included a new section on individual graphs for each region at the end of report.  My hope had been to include other information by regions, including option quotes.

–Option trading for “new 7” regions (BOS, DEN, LAV, MIA, SDG, SFR and WDC) now available, but different than other 4 regions (CUS, CHI, LAX, NYM).  See options page for details.

To expand on the comments above, the widening of bid/ask spreads is disappointing, but it’s a natural reaction to increased volatility, and a prudent risk-mitigation technique.  I’ve come to appreciate that those who compile index results for a living are likely better able to project prices on the front contract.  As such, I’m less inclined to try and bring bid/ask spreads into <1.0 point as expiration approaches.  I’d love others, who may have some strong views on near-term index values, to contribute more bids or offers.

The CME roll-out of options on the “new 7” (i.e. the regions where electronic trading of options was not possible until last month) did not go as planned.  That is, while my futures broker can clear trades that are negotiated off-line, I haven’t found a broker who’s able to post quotes in the new contracts.  To their credit, the CME tech team has been helpful in trying to see what the problem is, but they don’t see any difference between these how contracts are structured on these 7 regions (i.e. BOS, DEN, LAV, MIA, SDG, SFR and WDC), from the original 4 regions that were re-launched in 2012 (i.e. CUS, CHI, LAX and NYM).

Without electronic quotes, I’ll try to post color on the type of inquiries I’m receiving more often.  While the recap presents a page for puts on ~one-year contracts with the strike near the spot index for all 11 regions (to prompt discussion), I’m open facilitating any type of order, and/or being open to posting themes that people are trying to trade.  So, please send me your put/call inquiries and I’ll try to find the other side. (More in a future blog).

Finally, I’m seeing more interest in OTC forwards/options for other indices and/or other regions.  I’m open to taking modest, relatively short-dated exposure on many indices.  Anyone want to buy/sell Toronto, Vancouver, Greenwich, or Oyster Bay?

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss anything listed above, or any aspect of hedging home prices.


An Observation on Quicken Loans review of Homeowner Expectations vs. CME Forward Prices

Quicken Loans publishes an interesting monthly survey where they track what homeowners think of the value of their property versus the values that appraisers put on the same property.   Quicken highlights the ratio (HPPI) between these two measures over time, as well as how the ratio differs across regional areas.  (A number over 0 indicates that appraiser value houses more so than homeowners and a negative number reflects the opposite view, i.e. where homeowners are more bullish than appraisers.   In a related column where he focused on the results for Chicago, Gary Lucido raised the issue of whether appraisals might lag trends in some markets.

I tried to address the issue of possible bias in (or intelligence in) appraisals by comparing the Quicken HPPI index against one-year forward prices for CME Case Shiller home price index futures.  Now the futures have all of the problems that I’ve addressed before:  possible different geographic coverage, indices that are calculated in a different manner, and the thinness of market participation that might make one-year forward prices “jumpy”.  In addition, there are only ten CME regional futures contracts, while the Quicken summary data shows numbers for 27 cities.  That all said, within the ten CME regions, there does seem to be a linkage between HPPI and the strength of one-year forward prices.

The above graph displays the difference between the mid-market value of the Feb ’18 Case Shiller contract and the spot level (so a comparison of numbers 12 months apart) in percentage terms on the X-axis, versus the HPPI index on the Y-axis.  As a generalization, it appears that in regions where one-year forwards contracts are quoted at the highest level versus the spot index (so regions with expectations of stronger home price increases?), HPPI values tend to be higher.  Using the DEN and CHI contracts, and echoing Mr. Lucido, the appraisers seem to be buying into the strength of the DEN market at the highest level (among the ten contracts), while in Chicago, the appraisers are less bullish that homeowners.

At the moment, the appraisers’ views seem more correlated with CME forward values than homeowners are.

I would think (and hope to explore) whether this current correlation can be tested versus historical results (i.e. comparing past HPPI values against past one-forward CME values and eventual one-year gains) to see whether the appraisal community’s sense of current value is better correlated with future price gains, than that of current homeowners.  Any care to join me?

I’m open to discussing any research material (such as this Quicken report) that might help shed light on future home prices, or that might prompt discussion on the “wisdom” of CME prices.  Feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to contribute to this effort.


First options trade for “New 7” regions

Last week, the CME cleared the first options trade in the “new 7 regions” since their February announcement (see Jan 16 blog).  Recall while options trading in home price futures was re-introduced in 2012 for CUS, CHI, LAX and NYM, that now options can also be traded* in BOS, DEN, LAV, MIA, SDG, SFR and WDC.

This inaugural trade –that was originally teed up months ago as an OTC trade – was done by a Denver real estate investor –trying looking for protection against an unlikely, short-term collapse in Denver regional prices.  In “options-speak” it involved 6 lots of a slightly out-the-money put on the DENK17 contract where he was looking to protect some personal, notional amount of exposure.  As such, both the type of party (a real-estate hedger) and the degree of protection (low fee, for protection against a market move over the next 3-9 months) was consistent with the 3-4 other trades I’ve done here.

Furthermore, I’ve received multiple inquiries, over the past few years, who have looked to hedge the same risk profile, but in regions beyond CUS, CHI, LAX and NYM.  In fact, while the new contracts may expand the list of “coverage”, I also get inquiries for interest in hedging more narrowly defined geography areas (e.g. Greenwich), other regions that have Case Shiller indices (e.g. Seattle), to international cities such as Vancouver, to Beijing.

Many thanks to the folks at Insignia (who clear through IronBeam) and the CME for their efforts in facilitating this trade.

That all said, I used an asterisk (*) on trade, as the prospects for future trading in the “new 7” on the CME remains clouded.  (Posting quotes on the four original regions remains as easy as trading futures, so it appears that there may be something different about how options on these 7 regions are “wired” (for lack of a better technical term)).  It was a challenge to get the CME and IronBeam systems to agree on whether the options contracts were available (listed to be traded).   Insignia is the only broker that I’ve used for these seven regions so I don’t know if anyone else can enter option quotes on these seven regions.  Insignia has been extremely helpful and I’d like to continue working with them, but if another broker can post quotes on these options, please let me know).

On the other hand, the message coming from the CME sounds as their platform has been tweaked to be made more efficient in the last ~5 years and that these contracts may have been set up differently.  After all, why would the CME want to allow quotes on potentially >1,000 permutations of strikes, expirations for both puts and calls, particularly on contracts with such limited volume?!?   Bringing matched orders to an exchange for clearing, much as Eurex does with property derivatives might make more sense, and may be the path that the CME has taken. I don’t know for sure, but I hope to meet with the CME in the next two weeks to learn more.

Until I figure out how (or if) options in the “new 7” can be traded, I’m going to pursue multiple paths (e.g. being open to an additional broker, travel to meet with CME) as well as to try and foster options trading in the “new 7” via OTC trades.

OTC trades have challenges that I’ve written about before (see Dec 7 blog, or last week’s blog on NYC condos).  I think that capping potential payouts is one way to limit counterparty risk.  However, capping payouts, means working with smaller possible ranges of results.   That probably makes more sense for short-dated options.  Also many buyers have expressed an interest in disaster insurance, as a) they appreciated basis risk, and b) they only want to pay relatively small fees.  Finally, a cap on payments means that writers don’t have to post capital against highly remote one-year price moves.  Lower capital might lead to a higher ROE for put writers, thus enticing new parties to write puts.

Another feature to remind potential OTC option traders is that, as CME options are European in style (i.e. exercisable only at maturity), the OTC puts that I’m looking to foster will be so also.  There may be others looking for put on a moving spot index, and there clearly are mortgage products (e.g. Value Insured) that offer hedgers to exercise whenever they sell their house (if in the money).  While I’m happy to connect parties looking for such American-style options, my focus will be on one-time execution options.

As such, I’m going to focus on 6-12 month puts struck at levels that have a payout that kicks in (so strikes) at either about flat versus the spot index to -5%, with payouts capped at -10%.  (Note that one-year forward prices on all ten regional CME Case Shiller futures are 3-5% higher than spot levels.  As such strikes of flat, with payments increasing to some bottom floor of -10% will probably offer protection against all buy extreme outlier one-year price moves.

For purposes of illustration, here’s some levels that I’d suggest to start discussion on levels one where I’d write (sell) put options.  I’ve used 6-, 9- and one-year forwards as Feb ’18 expirations will settle on 2017 year-end index values (which are typically released with a two-month lag).  That will also align the expiration of these options with that of OTC forwards that I’d like to trade, that will also reference 2017 year-end indices.

The table to the left shows my suggested offerings if CME contracts could be cleared.  I’ve used strikes near spot levels (but below mid-market futures prices) and with a payout band of 15 points, however any strike and band is theoretically possible.  (If such trades were cleared on the CME it would be structured where the buyer buys a put at the strike and simultaneously sells one at the floor).

I’d love to hear from readers as to whether there’s any interest in put buying (or writing), these levels, and whether they have interest in other regions.  Please feel free to contact me (johnhdolan@homepricefutures.com) to get this conversation moving.



Hedging NYC Condos -a template for other regions?

I received an inquiry the other day about hedging NYC condo risk.  I wrote a somewhat extensive reply as:

  • I figured that there might be others interested in hedging the same exposure,
  • there already exists Case Shiller indices for the more geographically dispersed NYM index, as well as a NYC condo index, and
  • the issues raised here might apply to other one-off regional inquiries whether they be local (e.g. Greenwich), another Case Shiller index not traded on the CME (e.g. Seattle), a different index (e.g. Zillow, Core Logic, FHFA or other), or international (I’ve had discussions on how to hedge home prices in Vancouver, Beijing and London).

On the first point, NYC is right in my back yard (so I have a sense for it), and many of those who understand hedging and derivatives, work there.  It’s also a market with a massive notional amount, yet possibly with more fungibility than the New Haven to Jersey Shore to Putnam County NYM index.  So, lots of possible hedging interest with possibly less basis risk for individual home-owners (versus the index).

Second, I noted that there is a NYC condo Case Shiller index (as well as condo indices for BOS, CHI, LAX, and SFR -so we could have the same conceptual discussion with those cities).  (See “Additional Info” tab at S&P website: http://us.spindices.com/index-family/real-estate/sp-corelogic-case-shiller for data).

A quick analysis (see diagram below) suggests that the NYC condo index has been highly correlated with the NYM index.  (I used YOY % changes to minimize seasonality issues).  While the relationship has been strong, NYC condo index values have steadily outperformed the NYM region.  Both started at 100 in Jan 2000, but the condo index is now 270.92, while the NYM index is 185.26.  (I leave discussion of why urban areas have outperformed regional indices to other commentators.)

However, given the strong correlation, one possible approach to hedging NYC condo risk, may be just to short some amount of NYM futures.

However if one wants to hedge using the NYC condo index directly there are other issues to include:

  • price discovery on forward prices, and
  • counterparty risk, as there is no exchange-traded product that might typically help with both.

(Note that there are many NYC condo indices that one might use.  I’ve chosen to illustrate my example using the Case Shiller index as the correlation with the NYM would make hedging the futures exposure possible.)

An example of the challenge of price discovery might be if (hypothetically) you might want to sell the CS NYM condo index at +6% , one-year forward, versus the most recent level (i.e. 270.92*1.06= 287.16) while a buyer might only be willing to pay a price consistent with a +4% increase (i.e. 270.92* 1.04 = 281.76).  However, without an exchange, and/or  a central place to meet, or a chat room to compare levels of interest:

  • you might not find each other, or worse,
  • you might not know that there’s a buyer at 289!  (BTW- the same exercise would be true if the parties wanted to do an options trade.)

This is where I’m trying to help, via website blogs, and social media touting.  Think hub-and-spoke models.

However the challenge of the second point (counterparty risk), is that even if the parties agree to a price, how can one party ensure that the other side makes good should the prices move sharply against him.  I’ve tried to address this with an OTC (over the counter) trades where each party puts up some margin (e.g. 5-10% of notional amount) to a third party custodian, where that becomes the total maximum payout.

For example, let’s say that we agree to take opposite sides on a NYC condo trade at a price of 284.  We might agree that the notional amount equals $100/ lot, or $28,400 notional per lot.  So, if you wanted to put on a $500k hedge we might agree to use 17 lots (for $484,280 notional exposure).  Each of us would put up either 5% ($24,140) or 10% ($48,280) of the notional amount to a third party.  The payout one-year from now would be based on the difference between the CS index published one year from today, versus the agreed-upon price (e.g. 284).

As such, if the final index was 281 (the seller would be awarded (3 points (=284-281) *17 lots * $100/lot) and would get their initial payment plus $5,100, while the buyer would get back their initial payment less $5,100).  (I might charge some fee per lot for orchestrating the trade).  If 5% margins were used that payouts would be capped at 269.8 (-5% versus trade, where the seller would get all the collateral) and 298.2 (where the buyer would get all of the collateral.  Better still, I’d probably suggest bounds of 270 to 300 so that trades could be assigned and somewhat fungible.

While -5%/+5% might seem like a narrow range for one year moves, the range bounds expectations, not the spot index.  So if the trade price was +3% over the spot index, payouts would max out on moves of about -2% to +8% moves in the spot index over the next year.  On-year moves of more than 5% on a forward price are unusual, but not impossible.  One could work with wider margins, but down-payments on each side would be higher.  That is, the lower the margin, the better the leverage.

I’ve already done one such trade –for a different region – so this is not hypothetical.

There would be other issues.  Data vendors might demand licensing fees on the use of their index in a derivative trade.  I’m aware of some fee schedules but would have to check on other data vendors.   In one instance there is a large fee for the first trade (referencing an index) but then marginal fees are much lower.  Hence it will likely make sense to reference indices where either fees are low, or expected trading volume is higher.

So, does anyone want to talk about hedging NYC condo exposure,  condo exposure where there’s another CS index, or any other home price index around the world?  If so,  feel free to contact me (johnhdolan@homepricefutures.com)


Feb recap (finally!) posted

I was traveling over February month-end and wasn’t able to compile a recap for February until now.  (Work and technical issues also got in the way).  However, the Feb recap is finally done.  You can link to it here, or find it in the Reports section.

Here are the highlights from the summary page:

–There were 8 futures and 18 option contracts traded in Feb.  (The one options trade was an unwind at a low price).

–Futures trades were concentrated in 2 regions (CHI/SFR) spread over 5 expirations, and across 4 dates.  (I’d note that most activity from other traders was concentrated in these two regions, along with SDG and NYM).

–OI (Futures) gained one from 53 from 54, even as 5 Feb expired.

–Bids and offers were up strongly during the month.  (I’d note that prices jumped more this month that any in the also two years.  That said, the move only took quotes to the upper end of the trading band in the HCI contract that the market has been in for the last 2+ years).

–Forward curves stopped flattening.

–Bid/ask spreads were much wider, due to jump in prices.

–Calendar spread orders were triggered but there were no IC trades.  (I still both of these as both very useful tools as well as platforms for good relative-value debates.)

I’m still hopeful that the CME announcement that they would open electronic trading for all 10 regions starting Mon Feb 5th will come to pass.  I’ve been immersed in conversations with CME and IT departments but so far we are not “live”.  I have one DEN option trade (that was done OTC) that I hope to clear when trading starts.  In the meantime I’ve also received inquiries on options for DEN and MIA.

I did not include pages on options quotes in the recap as: a) I wanted to get a bare bones our report before any longer, and b) I suspect (hope) that options inquiries with start to trickle in once contracts are live.  I’ll post readers as IT issues get resolved to tee up some trades.

I’ve put together a new section in the report with individual graphs for each region.  My intention is to build out each page once option trading starts in the “other” 7 regions.  (Recall that electronic trading is still feasible in CUS, CHI, LAX and NYM contracts.  In fact 18 CHI options traded in Feb.)

Finally, I updated the home page to show some key graphs.  I hope to blog about the S&P 500 vs. home price futures.  I think that it’s a good graph to illustrate how separate the stock market is (with issues of changes to the tax code, repurchases of outstanding stock, and possible re-repatriation of offshore funds for corporations) with a metric (forward home prices) that represents the average homeowner.  Gains in the stock market go back to early 2016 so this is not a short-term political point.

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions, ideas, or trades related to hedging home prices, that you’d like to discuss.

Feb CS #’s vs. CME Quotes

The Case Shiller numbers released yesterday (Feb 28) were generally in line with CME quotes on the expiring Feb ’17 (G17) contract.  CME quotes from Feb 23 bracketed the actual CS # across nine of the ten regions (with NYM CS #’s coming in just slightly above the offered side of the NYMG17 contract)*.

I’ve used Feb 23 prices as I was traveling from then until yesterday.  While there were seven trades done on the 24th-27th, there were no trades yesterday.

Despite CS index values coming in within CME price ranges (so only one “surprise”) CME prices on longer-dated contracts have risen.  I hope to post a market reaction blog in the next day or so.

( I apologize for the “noise” associated with CME prices over the last 2-3 trading days.  Between travel, power outage (during home renovation), and other issues, many quotes were deleted and I’m manually re-entering).

As always, if you have any questions, please feel free to contact me (johnhdolan@homepricefutures.com) to discuss this blog or any aspect of hedging home prices.

(*- While I qualify all of my blogs that any numbers shown are my best estimate, or recollection of where contracts were posted, or where trades took place, given my recent time away from my desk, I want to remind all readers that they should not rely on numbers posted here for trading decisions, and that they should independently assess relevant market information.)