What's an investor to do when they see negative forecasts for the area they live? I ask as a recent Realtor.com article listed many cities where they are calling for a small decline in home prices in 2020, which might cause agents and homeowners to consider hedging options.
I'll use Kansas City (MO-KS) to illustrate an opportunity, but the example could be extended to multiple cities.
The illustration below shows levels for HPHF home price index agreements on the Freddie Mac (NSA) home price index values for year-end 2019, 2020 and 2021. Now, I recognize that Realtor.com cites to a different home price index series (based on existing home sales) so that price performance will vary. However the Realtor.com call of a 4.0% decline in home prices for 2020 is much lower than the +3.0% I'm showing here. ^1
That said, real estate agents, or homeowners worried about a decline in prices might consider the short (Put) side of a HPHF home price index agreement. (See website for details). I'm not interested in writing agreements for year-end 2019 (as performance is almost backed in) but show those numbers to project a base for prices on 2020 and 2021 agreements.
Recall that these OTC agreements are structured such that (to some limit) every point move from the agreed level is $100/ agreement. Agreements have notional value of ~$100 * index value, so on the Freddie Mac index, that would be ~$16,000 contract. Each user should consider how much, and over what term, they might want to hedge.
While I am open to either side of any agreement (in small exposures, ~10 agreements) to get agreements jump-started, my eventual intent to not say where home prices will be, but to provide a platform where hedgers from both side (longs and shorts) can come together to increase/decrease exposures.
Finally, for those interested in hedging one-sided risk, I'd listed a series of OTC put option prices that I'd be open to writing.
Again, I've used Kansas City as an example, but this concept is available on any of the largest 100 cities of the Freddie Mac index series. However, in some cases my levels may be far below those forecast by Realor.com (e.g. Atlanta). DM me to discuss any particular region.
Please feel free to contact me should you have any questions about this blog, or any aspect of hedging home price indices.
Thanks, John
^1 I've picked one of the largest differences between Realtor.com levels and mine to illustrate the difference. I'd also note that other home price index vendors (to include Zillow) have calls for positive HPA. A large difference between any two parties over 100 forecasts, with different parties referencing different indices, on some sub-set of the observations, should not be surprising, nor should it imply that one method is better than another, or that one is wrong. People, and their outlooks, can disagree. As noted in the first paragraph, my approach here is to offer a step should the differences be meaningful to an observer.