The debate as to what level home prices will be at year-end, remains contested. Current levels on the CME Case Shiller home price futures contracts, as well as Home Price Hedging Fund ("HPHF") OTC Relative performance agreements, might help frame this discussion, for both the national discussion, and for selected individual cities. (Note that while I'm showing quotes, or HPHF Relative Performance Agreements on 20 cities, I'm happy to offer quotes on other cities).
The top of the table below shows recent bids and offers on the ten components of the CME Case Shiller Feb 2021 (G21) home price index futures. Since the contracts cash settle on the index released in settlement month, and since the index that tallies activity through a three-month period ending two months earlier, the February contract references the Dec 2020 Case Shiller index. The contracts allow users to see where traders are willing to add/reduce a small amount of exposure (i.e. where they would be willing to transfer risk). While expectations of where the Dec 2020 index will eventually settle may play a role today, such views will be ever more important as settlement approaches.
The right side of the table shows how the current bids and offers compare to the year-end index values for 2019. Net, all contracts are bid at a discount to 2019 year-end levels, and several are offered at slight discounts. The CHI and LAV contracts are the "weakest" contracts (i.e. the contracts priced consistent with the largest declines), while BOS, DEN, and SDG are all bid close to parity with last year's levels. (Note these quotes are recent 1x1 levels -i.e. one lot bid vs one lot offered). Feel free to contact me for quotes on larger amounts or possibly inside posted levels).
Finally, note that these prices are subject to change. For example, the HCI (10-city index) price was quoted as low as 205 and as high as 234 in the last few months. That is, a benefit of a futures contract on home prices, is that as sentiment changes, or people's desire to hedge increases or decreases, such changes can be captured by changes in market prices.
The lower portion of the table shows suggested levels on the other ten components of the Case Shiller 20-city index. Each of the ten cities has a quote for a Relative Performance ("RP") Agreement. For example, RP Agreements on the ATX (Atlanta) index can be written where the bidder has priced ATX outperforming the HCI index for 2020 by 2.25%, while ATX exposure is offered at +4.25% above that of the HCI index.
Note that for nine of the ten regions, bids are consistent with the region out-performing the HCI 10-city index. That is, the RP Agreements are all priced (except DAX/Dallas) such that one has to "pay up" over the 10-city index to add exposure. That is, with the HCIG21 contract offered at 99.9% of 2019 year-end index values, all ten regions are offered above 2019 year-end values. Note that the "other ten" prices assume that the user would sell HCI contracts, and enter a long HCI/short regional RP Agreement to enter a net short exposure, (and vice versa to get long), I'd be very open to executing the HCIG21 leg at much more competitive levels if done in combination with an RP Agreement.
For more details please review my July 27th blog where I used examples of Seattle and Portland and my May 1st blog on hedging Minneapolis.
Net, despite Covid there are few bargains (i.e. contracts trading lower than last year-end's index values -other than CHI and LAV) and both the CME contracts, as well as HPHF RP Agreements suggest (today) that prices will be slightly higher on a YOY basis, across many of the 20 public Case Shiller indices.
Feel free to contact me if you have any questions about this blog, any ideas on hedging these 20 cities (or others), or would like to discuss the notion of using home price index derivatives in hedging strategies,
Thanks,
John
