Using futures to hedge under-exposures (future purchases)

The sell-off in SFR contracts described in my Oct 11 blog continued last week, but seems to have paused with the rally in stocks over the last two days.  However, even with prices stabilizing, quotes on SFR contracts have fallen to levels that may be of interest to those looking to buy a house in San Fran at some point in the future.  That’s because the offered side of longer-dated SFR contracts is only a small amount above current spot levels.  After years of 10+% home price gains, someone looking to buy a house today, but who doesn’t yet have enough for the down-payment, can lock in prices on the San Fran index 2-3 years from now, at levels that are consistent with home price gains of <2% per year.

For example (using the table below), Nov 2020 SFR home price index contracts were offered at 280, a level only 3.7% above the current spot index of 270.1, for an annualized gain of ~1.83%.  Someone able to save at a greater yield, or who might be able to add to their savings toward a down payment, can hedge against further runaways in San Fran prices.

To recall, the ability to lock in future index levels comes from the fact that the CME Case Shiller futures contracts prices “cash settle” on the index value at settlement.  As shown below, the SFRX18 (Nov 2018) contract, that expires next month, and SFR index have converged to narrow differences.  The X20 (Nov 2020) contract will similarly converge to the spot index -at some unknown price in the future.

Some notes:

  • Futures hedge against changes in index values, so aggregate movement in home prices, not prices of individual houses.
  • An individual contract has notional value of $250* price, or using a price of 280, $70,000.
  • There has not been much volume in SFR contracts, but 5-10 lot orders (so $350-$700k notional amount) can be traded. (Best to use limit orders, or contact me if interested).
  • Futures prices can rise/fall for a variety of reasons before expiration as traders have multiple reasons for buying/selling.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d care to discuss this blog or any other aspect of hedging home price indices.

2 Comments

  1. Absolutely love your website!.

    From the vantage point of being an active appraiser in San Francisco, the recent sell off in SFR contracts seems to coincide almost exactly with current market conditions. Seeing many price reductions, with many properties taking much longer to sell.

    Just wish I knew how to actively trade these contracts. Any educational guidance you could give me to learn the home price futures trading process would be appreciated.

    Keep up the great work!.

  2. Thanks. I like https://www.car.org/en/marketdata/data/countysalesactivity from the California Association of Realtors (which problably is just an amalgamation of what you’re seeing) for info on the LAX, SDG and SFR markets. (Will add to website under “Resources” tab. Check out the “Case Shiller-Introduction” link in the Reports section of my website for an overview of how the CME Case Shiller home price index contracts work. As to how to trade – find a broker who will let you trade (there aren’t many -Interactive Brokers does), realize that there will be long slow periods (Oct has been unusual), never enter market orders for >1 contract (feel free to contact me first), and focus your time on begin/end-of-day (when more eyeballs seem to be on the market) and in particular the dates around Case Shiller release (last Tuesday of every month). Feel free to email me (johnhdolan@homepricefutures.com) to discuss any ideas/trades. Thanks, John

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