Feb 2020 (so referencing year-end 2019) puts

I’ve posted quotes at the CME for puts on the ten regional Case Shiller home price contracts (and the 10-city index) that expire in Feb 2020.  Recall that these options will settle on the value of the Case Shiller index released that month, and that that index references data through year-end 2019.

I’ve picked strikes that are close to the closing value of the referenced futures contract.  Upon request, I’m happy to discuss puts at different (5-point interval) strikes.  (Different expirations can also be structured.  I’ve chosen the Feb ’20 contracts as they can be part of the “where are home prices headed in 2019” discussion.)

Note also, that I’ve started entering quotes on calls.  I’ll fill out the balance of the table over time, or if there’s interest on a particular contract.

I’ve not found many brokers that will allow users to trade these options.  Insignia Futures (contact Joe Fallico) is one broker if you are interested.  My $100 reward for anyone steering me to a futures broker that would allow for retail trading of these options, is also still alive.

Beyond these 11 contracts, I’m also open to discussing options on other home price indices for OTC (over-the-counter) trades.  Please contact me (johnhdolan@homepricefutures.com) if you have any particular index in mind, that you’d like to hedge (long or short), or if you have any questions about this blog.

Thanks,  John

LAV -The quintessential region for home price index trading?

My sense is that the best conditions for a home price index hedging market exist when you have:

  • Pronounced different views on the future
  • Recent history to color participants interest (or need?) in hedging
  • A mindset that trading (or hedging, betting) is an acceptable activity.

No regional market satisfies these three conditions better than Las Vegas (and therefore the LAV contracts traded on the CME).

First, opinions as to where LAV home prices are headed range, on the one hand, from the National Association of Realtors designating Las Vegas as one of its Top 10 Housing Markets for 2019 (with projected price gains of 7.9%), and Zillow also forecasting 7.74%), while on the other, the Greater Las Vegas Association of Realtors notes that inventory for sale has nearly doubled from the lows, and Fitch has designated Las Vegas as the most overvalued Top 20 city (at 20-24% overvalued).

Las Vegas housing inventory boomerang

Las Vegas home prices have the tailwinds of population growth and the headwinds of accessing sustainable water supply, adding to the debate over future home price forecasts.

Second, while current LAV index value (189.97) has more than doubled since the low in 2012 (of 89.88), the index is still only ~80% of the 2006 peak value (234.78).  The LAV index suffered the greatest percentage decline of the Case Shiller 10-city components (~-62%), and the second largest increase from the bottom of 211% (trailing only SFR at +225%).   Such volatility validates the benefits of hedging.

Third, other than possibly the Wall Street derivative community, where else in America is there a more open mindset to hedging one’s bets?  LAV residents seem to have the biggest need for hedging (given both the uncertainty and history).

However, volume and open interest (OI) in the CME LAV contracts remains low.  I tallied six LAV contracts trading in 2018, and current OI is three.

Recent LAV contract prices are consistent with MUCH lower home price growth for 2019, but well above levels (measured as percent of current price to spot) of the three California CME contracts (LAX, SDG and SFR).  For example, LAV hedgers should note that the LAVG20 (Feb 2020 expiration contract) settles on the value of the LAV index through Dec. 2019,  and is offered at 1.2% above spot levels.  As I’ve noted before I don’t know whether this is due to market imbalance (w/ bias that contracts have typically traded lower than expectations), change in fundamental outlook, an opportunity, and/or reflects lack of depth in this market.

On the depth of market issue, recall that each contract has a notional value of $250* price, or just under $50,000.^1  Most quotes are 1×1, e.g. one lot bid vs. one lot offered.  While posted quotes are actionable – and in bite-sized pieces that lend themselves to partial hedging^2 -my goal is not to be the market for LAV but to post initial suggestions on the market (or “line” in LAV parlance) while then bringing in as many participants on each side, to narrow the bid/ask spread and make more exposures available -on both sides.  While there are some efforts that offer home price hedging products at the individual home level, I think that the CME represents the best public, trade-able, play on forward home price indices.)

In any case,  I’m not suggesting that the G20 contract prices represent what I or other traders think the index will be a year from now (as traders have multiple reasons for trading) but it does reflect a level where some traders are willing to buy/sell LAV home price index risk.

In addition to futures, the CME also allows for option trading on the futures (both puts and calls).   Since a change in futures prices might result in a margin call, options have a benefit of limiting the total outlay for a hedge.  The table to the right has offering levels where I’d offer either puts or calls on LAV futures.

Net, the LAV market seems to have the biggest need for hedging of the larger US cities.   Those who might like to have more/less exposure to regional-wide LAV home price risk, might consider the CME futures and options.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price index risk.

Thanks,  John





^1 Note that initial margin is often less than 10% (or $5,000 in this case).  The CME sets minimum margins, but clearing brokers may charge more.

^2 See Feb 2nd blog for more details on bite-sized hedging.  https://www.homepricefutures.com/reduce-the-stress-of-100-rent-vs-100-buy-decision-with-bite-sized-pieces/


Reduce the stress of 100% rent vs 100% buy decision with bite-sized pieces

I imagine that one of the biggest challenges facing a first-time home buyer (and their real estate agent) is the binary leap from 100% rent to 100% buy.   Such a jump is often the biggest financial decision that people have to make.  With new homes costing $400-750,000 in certain markets, this is a decision that involves a multiple of annual income.  How can the upcoming wave of Millennials get comfortable that they’re making the right decision when looking at homes?

One way to possibly reduce the tension, is to make the decision in increments.  CME Case Shiller home  price index futures allow users to buy much smaller notional amounts of home price index exposure.  For example, one contract has value of $250 * price, so a contract priced at 250, is $62,500 of notional exposure.    That way, someone looking at a $625,000 house, can buy 1/10th of the exposure to a broad region (or more if they want to buy more than one contract.)  While I agree that much of home price value is “location, location, location”, the CME futures allow users to lock in home price exposure to a broad area.  Factors that drive home price across a region (e.g. Wall Street and communication jobs in NY, population inflows in Denver and Las Vegas) also contribute to individual home prices.

Not only can people buy bite-sized exposures to regional home prices, but given the recent sell-off in CME contract prices, in many areas home price exposures for one-year from now can be bought at less than today’s levels.

The table to the right shows  Bids, Asks, Closes on the CME Case Shiller home price futures for Feb 2020.^1 I’ve added the spot index level and the % of the Ask price versus  spot.  Note that in five of the regional contracts, the Ask level is below spot (highlighted in red.)

Note that I’m not saying that the futures contracts suggest where index values will be.  There are lots of reasons that a contract seller -to include me -might want to sell – e.g. hedging other exposures.  However futures prices and index values must converge by expiration.   If the pundits projecting even 2-4% gains across regional areas are correct a buyer at these levels could make money on the contracts, while also breaking down their 100% rent vs. buy decision into a small bite.

While I’ve highlighted CME contracts, the same concept can be negotiated using other home price indices in OTC (over-the-counter) trades for Feb 2020 expiration.  I’m open to inquiries on many indices and have structured a product where the notional value can be even smaller (using $100/point).

I’d be open to structuring a trade on any of the other 10 Case Shiller indices that make up the balance of the Case Shiller 20-city index (Atlanta, Cleveland, Charlotte, Dallas, Detroit, Minneapolis, Phoenix, Portland, Seattle, and Tampa)  the four Case Shiller areas with a condo index (BOS, CHI, LAX, and NYM), or many other public regional indices (e.g. FHFA).  Please feel free to provide me with areas that you might be interested in buying (or selling, as I’d prefer to match parties rather than take the opposite side of all trades).

Feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss this blog/theme, or any aspect of hedging home price indices.

Thanks,   John



1^ -Recall that the Feb 2020 contract settles on the index values announced that month-end, and those values are calculated on information through  Dec 2019.

Should Boston over LA be 2 points?!? -Super Bowl special (IC spreads)

Yes, I’m going to pile on to social media efforts to capitalize on Super Bowl interest.  Of course what I have in mind is here is getting readers to debate which side they prefer of the current pricing that has the CME Case Shiller BOS contracts outperforming the LAX contract (using the X20/ Nov 2020 expiration) by 2 (percentage) points.  In addition I want to illustrate how one might look at intercity spreads, to new readers.

To recap,  one can trade either side of two contracts outright, or an intercity spread between the two.  Intercity spreads allow for simultaneous execution of a long and short on two different regions at a pre-negotiated point spread.   There’s no risk of doing one side first, only to see the other move.  In addition, IC spreads typically are quoted at tighter levels than legging two trades.

Such IC trades can be very useful if a trader has a view about one region vs. another, but who doesn’t want to take outright risk.^1

The following table illustrates the logic required to get to 2%.   Contracts trade at different prices, so quotes are converted into percentages vs. spot.   The BOSX20 (Nov 2020 expiration) contracts are quoted at prices that are 98.8/101.6% above spot levels.  The LAXX20 quotes translate into 96.8/99.6%.   The contracts are quoted at 6 and 8 point bid/ask spreads so to buy one/sell the other would mean working at reducing the total 14 point spread (from bid on one side to offer on the other).

However, an IC spread of 60.2 would allow the buyer to own BOS at 218 (+100.7%/spot) while selling LAX at 278.2 (or 98.7%) over spot, consistent with BOS outperforming LAX by 2% between today’s spot level and Nov 2020.  On the flip side a 57.4 spread would allow a user to own LAX priced at 3% under BOS.

Someone who thinks that BOS and LAX will perform about the same from here through 2020 might consider buying LAXX20 at 60.2 over Boston (as the quote has out- performance for BOS price in, while someone who thinks that LAX will underperform BOS by more than 3% migth consider buying BOS at 57.4 points under LAX.^2


Note that this type of IC spread can be orchestrated on the CME for any pair of regional contracts.  In addition, OTC spreads are possible for indices not covered on the CME.

Feel free to contact me (johnhdolan@homepricefutures.com)  if you’d like to discuss this blog, or any aspect of hedging home price indices.


^1 Note will always be some outright risk as the contracts trad at different prices.  So while an IC trade may involve the same number of contract lots, it may not involve the same notional value.  That problem can be somewhat addressed by having more of one region than another, e.g. 5 vs 4.

^2 Note that CME spreads may be quoted with negative numbers.  I’ve used positive numbers here as clearer for illustration.




Majority of regions tipping toward negative HPA in 2019, falling from there in 2020.

Quotes on CME Case Shiller home price index futures have tipped over toward being consistent with negative HPA in 2019 for five of the ten regions (NYM, CHI, LAX, SDG, and SFR).  Of the other fiver regions none are much above zero HPA, with BOS, DEN, and WDC just below 1%.  Only BOS and LAV are priced for more than 1% gains against today’s spot levels.

The graph below is a candle graph that I use in monthly recaps.  Price quotes on each of 11 CME regions (the 10-city index contract (HCI) and each of the ten components) have been converted into percent vs. spot for bid, ask and mid.  For example, the BOSX19 bid, ask, and mid are 218.0, 221.0, and 219.5, while the BOS spot index is 216.56.  Each bar thus shows the relative width of the bid/ask spread as well as the pricing vs. spot for each region, standardized on percentage terms.  The outliers include LAV (priced consistent with gains for 2019), and SFR (priced at 2-3% declines through 2019 and 2020.)  There are 22 bars, one for X19 (Nov ’19) and one for X20 (Nov ’20) for each of the 11 regions.

The graphs shows which contracts are above 100% (i.e. where prices would be unchanged versus spot), and compares the X19 to X20 ratios.  Note that as a general rule, regions with lower prices for X19, tend to have even lower prices for X20.  Hence, the net inference one can draw is that quotes are consistent with falling home price indices in 2019 for half the contracts, but that prices are lower in 2020 (vs. 2019) for almost all.

I’ve written recently how all CME quotes need to be taken with a huge grain of salt.   The biggest point is the thinness of trading, as well as my belief (that I will explore in an upcoming blog) that longer-dated (i.e. more than 9 months) futures prices tend to be quoted at a discount to expectations.  (See Dec 11 blog: Pulsenomics survey: Why are surveys results more bullish than Case Shiller futures? for more perspective).  That said, several contracts are offered at discount to spot, or lower in 2020 than 2019, and no one’s “disagreed” (via an improved bid or purchase).  The contracts need buyers to balance hedging inquiries I receive.  Any takers willing to add what it likely a non-correlated risk to their corporate risk portfolio?

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

Observations on Bid/Ask spreads -1 Year to run

I’ve compiled an interesting set of data that I’ll use to illustrate how the CME S&P Case Shiller home price index futures have traded over the last 7+ years.  It may help traders understand how to better trade the contracts, as well as quirks within the contracts.   I will be blogging about over the next few weeks, to include an analysis the robustness of contract prices in forecasting, contract biases, and volatility.  I’m open to ideas on what readers might want to see, and would be open to slicing and dicing the information to address any longer-term questions.

I’ll start with a presentation on bid/ask spreads for a one-year horizon.  (Views using other time periods to follow).

The graph below shows the bid/ask spread on the one-year forward contract at the point nearest the quarterly expiration cycles that I could find.  For example, the information for Nov. 2012 shows the difference between the bid and offer on the Nov 2013 contract.  (The bids and offers come from information I’ve tallied over 7 years as market maker).  Spreads have been compiled for all 11 regional contracts (the 10-city index as well as each of the ten regional components).  There are 29 quarterly observations for all 11 contracts (except in May 2015 on where 7 quotes can’t be found.  Note gap in graph for some regions.).


I’d draw a few observations from the graph:

  • Bid/ask point spreads have generally compressed since 2013 ( with the narrowest bid/ask spreads, for all 11 regions, having occurred in Nov 2017 (for the Nov 2018/X18 contract)).  I attribute this first to getting past the large rally that started in May 2012.  The strength of that rally created uncertainty about how much indices might rise, after falling and wandering around lows for 3-4 years after Financial Crises.  Tighter bid/ask spreads since then seem to have been: 1) a function of greater participation by third parties, 2) greater confidence in my willingness to post tighter spreads, and/or 3) lower expected volatility.  All three factors, and the resulting tighter spreads, are conducive to increased trading.
  • Note that bid/ask spreads are shown in points.  Since some indices (and contract prices) are now double what they were in 2013 (e.g. the SFRK13 (May 2013) contract had a mid-market value of 132.3 in May 2012, vs. a spot index level today of 267.24) so bid/ask spreads on a percentage basis have narrowed even more.  (See Graph in Reports section showing bid/ask spreads in both points and percent, or access here).  BTW -The widest % spread across all 11 regions. in Nov. 2017 was 1.39%.
  • Bid/ask spreads have for the HCI 10-city index (shown in red) have generally had the tightest bid/asks spread.  LAV and DEN have recently been the tighest as prices have not sold off as much as other regions.
  • All regional spreads exhibit “seasonality” in that bid/ask spreads have been tightest on November expiration cycles.  (The one-year forward May contract has tended to be the widest).  The relative narrowness in November contracts seems to be a function of Nov being the longest contract. As such, it has more time to attract open interest which may be important as traders have a vested interest in quotes.
  • I’ve tried to be more “democratic” about bid/ask spreads over the last year (putting a personally-imposed cap of bid/ask spreads for much of early 2018), and the distortion between May and Nov quotes (as well as other quarters) has been less pronounced over that last 15 months.  I’m trying to promote more trading in Feb expirations, particularly in OTC trades, as that expiration references year-end Case Shiller values.  As such, Feb contracts will be better in sync (from a timing perspective) with the term that most forecasters use (i.e. year-end numbers).
  • HCI bid/ask spreads seemed to bottom out at ~1 point bid/ask spreads in 2015, 16 and ’17, but then widened this past November (2018).  I attribute that to the large sell-off seen across many contracts as California contract prices collapsed, and that I’ve written about in past blogs: CME Price declines since Sept 5 and Diagram to reflect changes in forward SFR markets.   Bid/ask spreads have continued to widen since early Nov as these contracts prices have not found a bottom (i.e. a level where third-parties will buy).  Only when we see two-sided interest would I expect bid/ask spreads to tighten back to mid-2018 ranges.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions from this blog, have any ideas how to analyze this new data, or have any questions related to hedging home price indices.

CME Price declines since Sept 5

While many reports focus on the historical robustness of home prices (e.g. “FHFA Home Prices See No Slowdown”), and some pundits have only slightly revised lower their forecasts for home price gains for 2019-20 lower, quotes on the CME Case Shiller home price index futures are consistent with more bearish outlooks.

The graph below highlights how much CME contract closing prices have fallen since Sept 5, 2018.  The graph shows the Case Shiller HCI (10-city index) in black, and then graphs of the closing prices for the available contracts for Sept 5, 2018 and Jan 23, 2019.^1  Below the graph I’ve shown the drop in closing prices, as well as the percent decline.  As I’ve written before, note that forward prices (i.e. Nov ’20/’21) are now below spot levels (“inverted”). 

Similar graphs are available in the Reports section (or access here) for eight other regions.  Those graphs illustrate that CME contract price declines have not been uniform.  For example, the SFRX20 (Nov 2020) contract is lower by more than 8%, while the LAVX20 contract has barely moved.

Much has been written about inventory shortages providing support to lower-prices home, while at the other end, prices in the more expensive, global cities (e.g. Toronto, Sydney, London) have been coming under pressure.  The scatter diagram below maps the changes in regional X20 prices versus the Case Shiller index cut-off for high price homes. ^2  Regional home price index changes appear to be correlated to regional prices (as measured by the cut-off in high priced tier).  SFR (and the two other higher-priced California indices) has sold off the most, while LAV (the area with the second-lowest high price home cut-off) has barely moved.


Again, the standard qualifiers for what users might read into this information applies.  Contracts are thinly traded (with only about ~100-150 contracts traded per year over the last three years), and many of the quotes are mine.  In some contracts (e.g. BOS, LAV, MIA, and WDC) there is no open interest.  However, quotes posted on the CME were, and are, live.  Users were able to (and did) sell SFR contracts before the collapse in prices.

While some point to lack of volume to question posted levels, I’d submit that as market maker, my role is to take inquiries and continually adjust prices to levels that I think will bring balance to markets, or to where I’m open to both bidding and offering.  So, even if there have been no trades in some contracts, contract prices may have moved as a result of feedback on users’ views.  In that sense these markets reflect more than just my views.

I’ll concede that as sentiment becomes ever-more one-sided (as the vast majority of the inquiries I receive are from hedgers),  contract prices may be (ever) lower than expectations.  Such an imbalance of orders, might present an attractive opportunity to risk-taking entities (e.g. insurance companies, pension accounts, hedge funds) looking take exposure to a new sector trading below expected levels.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price indices.

Thanks, John


^1 Note that where there are no open contracts (e.g. Feb 21, Aug 22) contract prices have been interpolated.

^2 Recall that Case Shiller indices are available by price tiers: https://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index



Observations from past home price declines -how they might impact CME Case Shiller futures today.

I’ve compiled a table of home price changes over the last two large downturns (the post S&L crises, and Great Recession), and the current cycle, that should be of interest to people trading home price indices today.  I’ve also posed some questions (below) that people trading CME futures, or academics looking for ideas on research papers, might consider.  Now, I’m not saying that home prices are headed lower (although several contracts are inverted, i.e. with lower forward prices than spot), but if the market does turn lower, past home price declines might shed some light on how the next downturn might play out.

The table shows the Case Shiller SA (seasonally-adjusted) numbers for three cycles: 1987-1993, 2000-2012, and 2011 to today.^1    (Note that the dates are the end of the reference period, not the month the index was released.  As such, the most recent month is October 2018.  Also, note-I realize that the font size in the table is small.  A copy of the table has been posted in the Reports section, which can be accessed here.).

The table is divided into two sections: at the top are the eleven areas that have contracts that are traded on the CME (the 10-city index and the ten component regions), and then, below them,  the ten other areas that make up the Case Shiller 20-city index (that would have to be traded OTC).  I’ve shown the minimum, maximum and subsequent minimum value for each index over each cycle.  I’ve then calculated the percentage gain during the rally, and the subsequent percentage loss on the declines.

I’ve also shown the length of each up and down cycle denominated in months.  Note that several CS indices (in the “other 10”) were not introduced until after Feb. 1987, so the percentage gains, as well as the length of the rally,  may not reflect home price moves over a cycle comparable to other indices.  I’ve italicized those results as the CS time series didn’t all start in Feb 1987.  Note also, that that there wasn’t a CS index for Dallas for the first cycle.

I’ve further highlighted the top four largest percentage price gains and declines after the peak of each cycle (with the biggest gains in green and the biggest declines in red).   (Note that only 3 of the 21 indices have a peak date other than the most recent coverage period, i.e. Oct 2018).

I’ve included a column (in grey) that shows the % difference between the peak value in the current cycle, with the highest value in the 2000-2012 series.

Finally, I’ve added (in yellow to the right) the mid-market value of the CME X20 (Nov 2020) contract vs. the spot index value.  Here I’ve highlighted the two contracts that are quoted at the highest (percentage) value versus spot (so, BOS, LAV, with DEN close behind) and the two contracts with the lowest value versus spot (so SDG and SFR, with CHI and LAX just below).  Note that the SDG and SFR contracts are down even more from the peak in prices in this cycle, as spot levels are already below peak prices.)


What to make of all of this?  I’ll offer some points here, and more in follow-up blogs, but would be thrilled if others weigh in with comments to my email address (which I might incorporate into future blogs).

  • The 1987-1993 home price downturn did not impact every region.  That is, many regions (at least 9 of 21) saw prices increase right up through Jan. 1993 (the end of my measurement period).  That prompts the question as to whether a future downturn will be large enough to hit all areas (as it did in 2006-2012), or small enough to only hit selected areas that may suffer from local issues.  Incumbent in that question is whether there are large forces in place that will drag all markets down (e.g. a spike in interest rates), or only certain markets for selected reasons (e.g. reduction in deductibility of SALT), population shifts, decline in local wealth (e.g. Silicon Valley), and/or affordability.  Will fear of seeing price declines in one area, prompt users to hedge in their area?  Net, there should be lots of opportunities to debate relative forward outlooks via inter-city spread trades.
  • The peak in prices in the first cycle (of those that saw a decline by Jan 1993) varied from May 1988 (in New York) to Sept 1991 (in Las Vegas).    The same was true for the second cycle where BOS peaked in Nov 2005, but Charlotte didn’t top out until Aug 2007.  As such, one question (related to the above) is whether the declines that we’ve started to observe could be unique to those areas, or precursors to drops in other areas .
  • For those areas that did see downturns, the period until prices hit bottom was drawn out (in both cycles).  Bottoms were even more spread out across regions with Denver hitting bottom in Nov 2009 (after selling off <12%) while 3 areas waiting until March 2012.  Downturns averaged about 2/3rds of the time measured (since Jan 2000) but the rallies would be even longer (and bigger) from the absolute bottom in prices.  (I may go back to start middle series at past low in next iteration).  These points might impact shapes of forward curves on CME futures.  That is, if there are price declines in 2019 (and if they are relatively small) when might we see prices later pick up.  This may play out in calendar spreads for 2021-23.
  • Those areas that saw the greatest increase in prices (in 2006-2012), also saw the greatest collapse.^2 
  • Those that saw the greatest decline in the 2000-2012 period have been some of the best performers this cycle (going from just being oversold, or something else?).  Examples include Las Vegas (+109.6%), Miami (71.8%), Phoenix (87.3%).  What factors drove those markets higher in the last cycle, and how likely will those factors be replicated in this cycle (even assuming that a decline has begun).
  • While some areas are up sharply off the prior lows, they have not gone far past the prior peak  For example, Tampa and Los Angeles are up ~70-75% from the lows, but below prior peaks.  By contrast, Chicago, Las Vegas, Miami and Phoenix are still below past highs, while Denver and Dallas are up about 50%.  How much should gains over past highs factor into forecasting possible future selloffs?  Will homeowners in the area with large gains be more prone to hedge (and less concerned about execution price) than those who’ve seen much smaller gains this cycle (e.g. New York, Cleveland).
  • The West Coast includes three cities that have already come off their highs in this cycle: San Diego, San Francisco, and Seattle, as well as the regions with some of the largest gains (e.g. Los Angeles +~75%, San Diego +~70%, San Francisco +~109%, Portland +77.3%, and Seattle +91.8%.  Was there a China/Asian effect in play (particularly once Vancouver started taxing foreigners?)  Will these areas be disproportionately impacted if the Chinese economy slows?  What other factors may have driven California home prices to such highs (and are those reversible)?  What should be the impact on volatility assumptions for options -both outright and relative to other regions?
  • Some areas that came through the 1987-1993 cycle unscathed (possibly due to population inflows?) -e.g. Miami, Las Vegas, Phoenix – were the worst performers in the Great Recession cycle. Some have argued that these were areas where sub-prime lending had a large effect.  Without subprime lending today (but not ignoring FHA’s role) are these areas likely to perform better this time?

All of the above topics are of interest to me in quoting CME futures and OTC trades.

Trading in CME futures has historically picked up when markets turn (e.g. 2006-2007 and 2012) so I’m hopeful that we’ll see it this cycle.  I can’t think of a better public, pure-play for financially expressing a view on forward home prices, than the CME futures and options contracts.    That said, given the curve inversions, and volatility of certain regions (most notably on the West Coast) I expect current traders (including me) to be more defensive as the current situation evolves.  This market will need more involvement – particularly from the long side – to avoid becoming overly one-sided (e.g. all hedgers looking to sell at the same time).   CME prices are currently consistent with HPA gains several percentage points below those expressed in surveys and home price forecasts.  There may be an opportunity for those with such views (and their readers) to add home price exposure, at what they might argue, are attractive levels.

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







^1 I don’t often used the SA series, but I wanted to pick out highs and lows, and was worried that seasonal factors might hide a key intra-year value.

^2 Note issues with calculating percentages, e.g. LAV went from 100.4 to 235.76, for a 135% gain, but then fell through the starting point to 90.52 for “only” a 61.6% loss.

Home Prices, Equivalent Rents, CPI, TIPS, and Fed Policy

I have an angle to discuss with anyone following CPI (inflation) and Fed policy.   This is my latest effort to look for reasons for potential longs to be interested in the inversion that’s taken place in the CME  Case Shiller home price futures.

The table below draws data related to home prices and CPI from a number of sources and is being used to pose the question: what happens to inflation (or inflation expectations), if year-on-year CME Case Shiller home price futures suggest that home price gains for 2019 and 2020 might be negative?  (…and from my perspective, might this merit a trade?).

The historical data (2014-2018) shows CPI, YOY the Case Shiller 10-city home price index (and YOY % changes), the Fed (St. Louis) calculation of equivalent rents, and the premium of equivalent rents over CPI.  I’d note that the YOY gains in the Case Shiller index have been about 50% greater than equivalent rents, and that equivalent rents have been higher than overall CPI each year.  (Note that owner’s equivalent rents makes up about 25% of CPI)

However, the CME futures for Feb 2020 (so referencing year-end 2019) and for Nov 2020 vs. Nov 2019 (so a possible proxy for 2020) YOY clearing levels, are both negative.  What impact might actual negative Case Shiller YOY values have on the calculation of owner’s equivalent rent?  I would imagine that it might drag down that portion of CPI.    If so, then why are inflation expectations relatively unchanged from 2017-2018?

I might imagine that such inflation expectations are priced into shorter TIPS (Treasury Inflation Protection Securities).  If so, there might be an opportunity for someone participating in both markets to short TIPs and buy 2-3 year forward HCI futures.  There has been little traded, but I’d be open to trying to facilitate a small trade by selling 10-20 lots.

Meanwhile, if the contracts are correct (despite thinness of trading) how might the Fed proceed?    If lower home price gains reduce inflation, it might appear to give the Fed license to continue unwinding the balance sheet, without immediate fear of inflation rising.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss the above blog, have any questions on it, or have any trading ideas.



Performance of regional contracts in 2018

The performance of the CME Case Shiller home price Nov ’19 futures contracts varied by region during 2018.  (I picked Nov ’19 (X19) as the Nov. cycles tend to have the best liquidity.)

Six of the ten regions were higher (with LAVX19 posting, by far, the largest gains of 16.o points, and DEN and SFR also up), while four of the regions were lower (with CHI and NYM falling the most).  Given the larger weights in the 10-city index of the CHI and NYM contracts (and LAX which also fell), the HCI X19 contract was also off 4 points, or 1.7%.

Notably, six of the eleven contracts closed at levels below spot index values.  (See the Close/Spot-1 ratio in the “Mid/Spot-1” column).   This inversion has not been seen since before 2013.

There were 110 contracts traded last year with >50% in SFR.  Two of the “quietest” contracts (LAX +0.9%, MIA +0.5%) had no trades for 2018.  One of my resolutions f0r 2019 is to change that, so please reach out (johnhdolan@homepricefutures.com) if you have a trading idea for those regions, or if you’d like to discuss this blog, or any aspect of hedging home price indices.

Thanks,  John