An alternative to “Fractional Interests”? (Package of CME Case Shiller Futures and T-Notes).

A number of fractional interest (“FI”)/ shared appreciation programs/ have been gathering steam (and funding) based on the assumptions of modest home price gains, paired with leverage (in the form of a homeowner’s mortgage).  The back-of-a napkin illustration is that should a home with an 80 LTV rise in price by 3% per year, the equity will rise in value by 15%.  An FI investor receives no cash flows (other than when the house is sold) but typically has no obligation for any expenses (e.g. mortgage payment, real estate taxes, home insurance, broker fees.)^1  (See footnotes at bottom of blog).   Since over the long-term, home prices might rise with rents, income and GDP,  the FI assumptions have merit.   I think that this is a great financial concept that could allow homeowners to have better access to buying (or to remaining in) the house of their dreams with reduced exposure to home price.   In addition, buyers of FIs can use this concept to gain exposure to the spot home price market wherever they want. ^2

However, the premise for gains is that home prices will rise by more than some amount.  Timing is important.  Forward markets for home prices, or in the following example, futures markets, may present an alternative opportunity.

For example, let’s say that you want to have generic home price exposure to the San Francisco market for the next four years.^3  An FI investor would have to pay the manager to find product to originate, ensure (or pay to ensure) that interest, taxes, and insurance are kept in force, and filter FI agreements to make sure that the homeowner can’t sell the home (at a slight loss) before the fourth year. Alternatively, (as shown below) one might create the same (or slightly better) cash flows using a combination of futures and Treasury notes.

On the left side of the table is a hypothetical investment in an FI.  I’ve shown the analysis as if the investment was in a $200k house (in SFR?!?!) but it could also be a share of a bigger house.  I’ve assumed that the price of the house mirrors the Case Shiller index over time.^5   As such, the house purchased for $200k when the index is 269.21, would change in value by the same percent as the change in the SFR index by Nov 2022. (see two left-most columns).  Leaving mortgage amount constant, the equity changes in value more dramatically.    That is, should the ending index value be 275, the equity would rise by $4,301, or 10.75%, over the four years.

To the right is a nearly similar exposure except taken with 3 CME Case Shiller SFRX22 futures (purchased at 275- the offering price yesterday).  While there is (of course) no gain if the contract settles at 275 in Nov 2022, the futures buyer will have the $40,000 to invest over the four years, that they didn’t have to use to pay the equity.^6  Assuming a 3% compounded return^7 on the $40,000, the cash would grow by $5,020, or 12.6%

Since both scenarios would result in someone holding about the same San Fran exposure,  the impact of changes in the index would be about the same.^8  The combination of futures and T-Notes out-performs in all shown scenarios. 

Net, while I’m a fan of FIs, there may be alternatives if a forward contract exists, and trades at an attractive rate relative to spot (i.e. we’re late in the home price cycle).

Anticipating a few nits:

  • The SFRX22 contract has had limited volume.  Each contract has notional value of ~$68,000.  An offer of one lot (at 275) may not present a viable business alternative.  That said, I expect more might be offered, or one might try to buy more contracts at a lower price.
  • The example I used has a home with 80 LTV.  Lower LTVs are also possible/allowed in FI programs, which might result in lower equity returns, thereby making the futures/T-Note combo more attractive.  (added after initial posting)
  • An prospective FI buyer looking for longer-dated exposure might be able to switch back and forth from FIs to this combination, and back again.  Most of the FI programs I’ve seen assume that FIs can be bought as homes are purchased.  There would be nothing stopping somebody from using this combination as a temporary parking place until they found the most attractive FI- to include up to Nov 2022.  In fact, if one believes that the SFRX22 are trading “too low” based on hedging needs, one might be able to unwind this trade, and reverse back into an FI in the future.  (As an FYI -in August traders were willing to pay 12.4 points to buy SFRX22/ sell SFRX18.  Today the SFRX22 is bid only 2.5 points higher than the Nov. 2018 spot index).
  • While FI programs may calculate an NAV, there may be no guarantee that an investor will be able to redeem at a discount, at NAV, or at a premium.  Today, there are public prices on the combination, and each part (the futures and T-Notes) can be traded.
  • I realize that there may be different tax treatment for an FI (long-term capital gain?) versus a strategy using futures (short term gains) and TNotes (interest income).  My point here is to illustrate that home price markets (i.e. FI’s and forward/futures markets) are connected.  Standard qualifier that you should consult with your accountant on any investment.  (Second update post original post).
  • Finally, while I’ve used SFRX22, this combination “strategy” might be an alternative for any index offered at level with gains (verus spot) of <3% through Nov 2022.  CHIX22 is quoted 98.4/104.0% so it might be possible to replicate this using the CHI index.  The HCI 10-city contract HCIX22 is quoted 101.7/103.4% so also close.  Finally, there may be other hedgers looking to short other indices (e.g. Greenwich, Ct., Dallas, Texas (see recent WSJ article) that might work in OTC trades.  I’d be happy to work with anyone looking to take exposure to such an FI-like combination in these, or other areas.

Feel free to contact me ( if you have any questions on this blog, or any aspect of hedging home price index exposures.


^1 Terms, including participation rates, and events allowing, or leading to unwind, are unique to each program, and may differ substantially.

^2 BTR (Buy-to-rent) programs (e.g. Invitation Homes) may be another way to gain exposure to home price risk, however the manager may already have concentrated exposure in geographic areas other than what a buyer would target.  FIs can be targeted to selected regions.

^3 I picked San Fran as it has both the flattest forward curve of the ten regional CME Case Shiller home price index futures, as well as because the SFR contracts have had the most activity.  Also, I’m using 4 years and the SFRX22 (Nov 2022) contract, but the same analysis might apply to the SFRX23 contract (when it starts to trade).  One might be able to even create longer expirations in an OTC trade, but those would require price discovery (as there is no exchange-traded product),  sellers at a level that works, and introduce counter-party risk.

^4 Recall that each region has 11 expirations, but a) the Nov contracts are quoted tighter, and b) making Nov vs. Nov comparisons dramatically reduces seasonal biases.  Also, there is a Nov 2023 contract, but no trades have yet occurred.

^5 Of course, an FI originator might claim that they only buy homes in above-average areas.  There may also be a debate as to whether new homebuyers (80 LTV) default at higher levels than those represented by a broad index, such as Case Shiller.  I’ll leave those points for others to argue. For now, this is just presented as an alternative for someone seeking generic home price index exposure.

^6 The futures positions requires margin but, for this example, the buyer might post the $40k T-Note.

^7 I’ve used 3% yields on T-Notes.  Those with a higher cost-of-capital might assign an even higher return to freeing up the $40k not spent on equity.  Further, since the yield curve is upward sloping the yield available for longer exposures (e.g. using SFRX23)  will be slightly higher.

^8 A key difference is that if home prices fall more than 20%, the FI holder will lose their entire equity, but no more, while the futures buyer would still be on the hook.


CME Case Shiller home price index futures -post #’s

This morning’s monthly release of Case Shiller indices has been followed with a modest (net) mark-down of quotes on the CME home price index futures.   As highlighted in the table below, index values tended to be lower than mid-market level on the expiring Nov ’18 (X18) contract.  For example, the LAX and SDG indices (in red) were well below contract bids, while the BOS, DEN, and WDC index values (in yellow) were just under the bid side.   Only the NYM index was higher than the offered side of the NYMX18 contract, but there was a 0.60 upward revision in last month’s NYM index that seems to have contributed to this upward “surprise”.

Note toward the bottom of the table that the mid-market levels did a relatively good job in projecting YOY differences.  The YOY gains for the LAX, NYM and SDG index values were the only ones more than 0.2% away from the mid-market contract levels.   (This, and the small number of big “surprises” (i.e. LAX, NYM and SDG) should be no surprise as all of the activity backing the data on  Case Shiller index calculations took place before Sept. 30th.)

Finally, note (at the bottom of the table) that YOY gains have been plunging for most regions (with the already slow CHI and WDC being the exceptions).  Some YOY price differences between closes on selected longer-dated contracts (e.g. Nov 20 vs Nov 22) are now almost zero.


Prices on (my) benchmark Nov ’19 contracts reflect the negative surprises.  The table below shows quotes on the Nov ’19 contracts before and after (around noon today, so not live) across the 11 regional contracts.  The changes in the LAX and SDG contracts (highlighted in red) stand out from the slight declines in 7 of the other 9 contracts.   Consistent with the comments above, the NYM contract (and LAV) is higher.  Bid/ask spreads across the 90 contracts with 2-sided markets, average about 1/3rd point wider.

Finally, with the expiration of the Nov 2018 contract, the CME has opened a  Nov 2023 contract.  I’ll fill out some quotes by month-end, but my focus (and suggestion) is to channel any interest in longer-term exposure to the X20 and X22 expirations.

Feel free to contact me ( if you have any questions about this blog, or any aspect of hedging  home price index exposures.

Thanks,  John


Nov ’18 -Quarterly expiration next week of Case Shiller home price index futures

The Nov 2018 (X18) contracts will stop trading on Monday Nov. 26th at 3 PM EST (note – one hour before other contracts) after a 5-year run.   There is open interest of 18 contracts across 7 regions, so some traders may want to close out positions, or extend hedges, before cash-settlement on the Case Shiller index values released on Tuesday Nov. 27.

To recap past blogs, since the contracts reference activity during the months of July, August and September, and since the contracts cash-settle, at this point, trading in the contracts should be mostly based on traders’ projections of the index values to be released on Tuesday (as the index references events that have already taken place).  Thus, in theory, bids and offers should bracket market expectations.

The table below shows:  historical index values for the 11 regions, Friday’s bids and offers on the 11 CME X18 contracts, historical prices converted into year-on-year (“YOY”) differences, and the YOY difference between Nov ’18 bid and ask, versus the index values from Nov ’17.

Bid/ask spreads tend to be < 1 point (except LAV and SFR which have been more volatile).  Also note, that Mid/ last year YOY projected differences are generally lower than that of the last few months, consistent with many projections of declining HPA (home price appreciation).

Despite the efforts of many home price analysts trying to replicate the Case Shiller methodology, actual index values tend to fall outside the bid/ask range on the expiring contracts, even up through the last day of trading.  I label these events “surprises” and will highlight all after Tuesday’s numbers.

Beyond the 11 CME exchange-traded regional contracts, I’m trying to develop interest in derivative trading in other home price indices.  Here are my “markets” on the ten more regions, that along with the ten above, make up the Case Shiller 20-city index.  Note that I’ve labeled these at OTC (over-the-counter) as trades would need to be negotiated privately.  While the CME contracts trade with contracts worth $250/point, I’m open to “trading” these second ten regions at $100/point notional values.

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

Thanks, John



Options updated (1 year @ spot levels for 11 contracts)

I’ve updated two-sided CME quotes for puts on 11 regions, for Nov 2019 expiration (x19 contract), at strikes near spot levels.  The table is shown below and is in the Options tab.

There’s been no volume and near no open interest, so this is as much price discovery as it is product promotion.  That said, most inquiries have been for slightly below contract levels, and near spot, as those inquiring have a) expressed concerns about index levels falling below spot levels, and b) using spot level strikes results in a lower premium than a strike set near contract close.  Again, most of the inquiries have couched comments as “disaster insurance”.

You might correctly infer from the far-right column that I’m using different volatilities for the various regions, with the 10-city contract as the lowest and SFR as the highest.

I’d be open to outright inquiries or typical option strategies (e.g. delta-neutral trades, bull/bear spreads, combinations of buys on one contract vs. sales on another.

I’d also be open to quoting other expirations and strikes, and/or calls.

Please feel free to contact me ( if you have any questions related to this blog or any other aspect of hedging home price indices.

Thanks,  John

Exploring regional home price index markets beyond the 10 CME listed contracts

Someone looking to hedge home price index exposure might find one of the ten regional contracts listed on the CME (plus one for the 10-city index) useful, but what if you’re looking to gain exposure (long or short) to another area?  There are another ten, public regional indices  (that with the first ten, constitute the components of the Case Shiller 20-city index) that are updated monthly by S&P/Core Logic.^1  I’m not aware of any platforms that allow trading in contracts referencing those indices.  I’d like to try and change that.^2

The table to the right shows the quotes on the ten CME regional Feb ’19 contracts, in green. Bids, offers, the bid/ask spread, and the percent difference between the mid-market level and the index value from Feb 2018 (for the Dec 2017 index), are shown.    The section below (in blue) shows suggested bids and offers on the second ten Case Shiller indices, assuming a derivative with similar attributes to a CME contract.   Prices on the CME quotes are actionable (while live, and updated, and when the CME is open) while prices on the “2nd 10” are subject to negotiation in an OTC format.

I’ve picked the Feb ’19 contracts, as the contract settles on the index values for the period ending in Dec 2018.  As such, this contract will better highlight percent changes in an index value over a calendar year.  My hope would be to roll out prices on the “2nd 10” for a Feb 2020 contract sometime over the next two months, and, like here, contrast results versus CME quotes.  That would then facilitate discussion about home price index expectations -across an expanded set of regions -for 2019.

Since this is my first (public) effort to put bids and offers on the “2nd 10” set of indices, I’d like to hear feedback on my proposed bids and offers.  I’d be open to structuring smaller OTC trades (e.g. $100 a point vs. $250 on CME contracts) to start, and/or would be happy to serve as a bulletin board for anyone with a strong trading axe in these regions.

As there is no exchange to trade these “2nd 10” regions, if interested, please contact me for a trading idea that will address issues related to margin and counterparty risk.

Feel free to contact me ( if you have any question on this blog, or any other aspect of hedging home price index exposures.

Thanks,  John


^1 See page 8 of Case Shiller Home Price Index Methodology

^2 Even more indices could be explored.  In addition to the 20 public Case Shiller regional indices, other Case Shiller indices are published for private use (see page 32 of Case Shiller Home Price Index Methodology) Core Logic has expressed a willingness to create customized Case Shiller-style indices  In addition, indices from other providers could also be used for other areas, or for more narrowly defined areas within any of the Case Shiller regions.  I intend to blog about one such subset (Texas) in the next week, and would be open to discussions about home price index hedging on other more localized indices.


AMZN/HQ2 possible impact on DC home prices- Using the buzz for a primer on call options

The DC press has been all abuzz about the prospects of Amazon picking the DC/ Northern Virginia area as the site of their HQ2 and the potential impact on home prices in the region.  However, speculation on how to play the real estate market in the run-up to the anticipated year-end announcement has not resulted in many tradeable strategies (other than JBG Smith Properties REIT -JBGS).  If one has a view that DC home prices might pop, Case Shiller WDC home price call options, that can be traded on the CME (Chicago Mercantile Exchange), might be an ideal strategy.  As such, let me use the AMZN buzz as an opportunity to discuss call options. Note that while my comments here relate to the Case Shiller WDC index, calls (and puts) can be traded on the CME for nine other regions, and I’d be open to structuring options on any other home price index).

For those new to futures and options, WDC is one of ten set of regional contracts listed on the CME.  Each region has expirations that will settle on the value of the respective Case Shiller index at the end of the expiration month.  Contract expirations range from Nov 2018 to Nov 2022 (but I’ve only listed the first eight here).   Options (both puts and calls) can be quoted on any of the expirations, for any strike.

Contracts have notional values of $250 * price (i.e. each point =$250), so a contract priced at 230 has notional value of $57,500.

The table below has offering levels for nine contracts (three strikes for each of three expirations).  As with most options, the longer the time to expiration, and/or the lower the strike (relative to futures contract value), the higher the premium.

The graph below shows the payoff of two options (the Nov ’19 235 and 240 strikes) at expiration, and illustrates that for index values less than the strike, the call buyer doesn’t receive anything, but then participates 1:1 with gains in the index.  (Options and futures prices can vary between inception and expiration for any number of reasons.  A benefit of options is that regardless of any price moves, the option buyer cannot lose more than their initial premium.

A few notes:

  • There has been no volume in WDC futures and options for many months, but I’m trying rejuvenate interest and as such, am happy to answer any questions, and/or facilitate trading inquires.
  • Calls on other strikes and expirations are possible.  Contact me if you’d like a quote.
  • While I’ve shown suggested offering levels, I’d also be happy to buy calls.
  • My focus here has been on calls, to address interested parties that may want to put up some money for the option of a particular event.  Futures could also be used to express a bullish view (and I’d be happy to accomodate any inquiries) but a futures buyer runs the risk that prices may drop, requiring more money to be posted.
  • To reiterate my comment from above, my observations here related to the Case Shiller WDC index.  I’d be open to structuring an OTC option trade on other home price indices.
  • There are not many futures brokers who trade Case Shiller options.  Please contact me for names if your broker does not.
  • WDC contract covers a broad geographic area (see page 8 in CS Methodology in Reports section for listed counties).

As always, feel free to contact me ( if you have any questions or would like to discuss any trading strategies.

Thanks,  John

(BTW -See Core Logic’s report on Amazon HQ2)



Oct recap of activity in CME Case Shiller futures – busiest month in the last year.

I’ve posted a recap of activity in the CME Case Shiller home price index contracts for October.  The recap is in the Reports tab or you can access here.

Highlights of recap include:

–There were 22 futures contracts traded in October, across 6 expirations, and 3 regions.  Trading, and third-party quotes, in SFR contracts (where 12 lots traded) dominated activity.  There have been only 3 months since Nov 2013 with higher volume.  Beyond that, activity was scattered across the month and often throughout trading days (particularly when the equity markets were volatile).

–The LAV, SDG and SFR contracts had the most regional activity, with LAV (and WDC) breaking away from other contracts is not falling much.  Forward HPAs across regions have started to diverge from the 10-city index (some priced for better HPA / some for worse), consistent with either different outlooks across regional markets, or given limited trading, pressure on regions where traders are looking to hedge.

–There were no options trades (but many inquiries.)

–Bids and offers collapsed across most regions in the largest sell-off in CS contracts since the Financial Crises.  The LAXX22 contract saw the biggest decline of ~12 points.  LAV and WDC were relatively unchanged.

–Forward curves flattened with some calendar spreads in longer-dated expirations bid at negative spreads (i.e. sell front contract/buy back one for a lower price).

–Increased volatility, combined with flattening of forward curves, led to much higher put option quotes.  (My standard page of one-year puts is not included in this recap, but will be the topic of a blog early next week)

–Despite volatility, bid/ask spreads only widened a small amount (as more traders weighed in, often throughout trading days).  Such widening was concentrated in X20 and longer contracts.

–OI on futures increased from 47 to 49, consistent with some positions being closed out, or intra-month trading.

Feel free to contact me ( if you have any questions on this blog or any aspect of hedging home price indices.


CME Markets post this morning’s Case Shiller #’s

Quotes on the CME Case Shiller home price index futures are generally lower by about 1/2 point per contract, after this morning’s release of the monthly Case Shiller numbers.  The table below shows prices for the 11 Nov. 2019 contracts (X19) comparing yesterday versus today.  The LAV and WDC contracts are higher (based on mid-markets) but all nine other contracts are lower.  Home price indices on the coasts (BOS/NYM and LAX/SDG/SFR) faired worse than those inland.  (This despite substantial upward revisions in last month’s NYM index.)

Forward curves continue to come under pressure.  While the S&P press release led with the headline “Annual gains fall below 6% for the first time in 12 months”, year-on-year price differences on several contracts are consistent with HPA dropping to <2% by 2020.

There have been no trades yet today, but 22 contracts have traded this month, the largest monthly total since Jan. 2017.  (My sense is that volume picks up when markets change direction.  The biggest volumes were in the first months of the Financial Crises and in Spring 2012 when home price bottomed.)

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

Thanks,  John

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 ( if you’d care to discuss this blog or any other aspect of hedging home price indices.

Miami -Four factors to consider

I have not received many inquiries on the MIA (Miami) set of Case Shiller futures contracts, and there is zero open interest, so I thought I’d give the MIA index and contracts one day in the spotlight to prompt some possible comments or trading ideas.

Without trades, or even many inquiries from third parties, it’s more challenging to quote MIA contracts. What does make market making somewhat viable is that, over recent history, changes to the MIA index levels have been in line with those of the HCI (10-city) index.  (See graph).  (Note -indices on all ten of the Case Shiller regional contracts traded on the CME have been very highly correlated with the 10-city index since Jan 2011.  MIA, in fact has the second lowest correlation (ahead of LAV) of ~75%).

YOY gains in the MIA index have been lower versus the CS 10-city index over the last year so absent futures differences*, I’ve just been quoting the MIA contracts as weaker versions of the 10-city index contract.  As noted in the table, the differences in closing prices on forward MIA contracts (to the far right, in yellow) are consistent with slightly lower changes than those observed on the HCI contracts.

However, my asterisk on the phrase “absent future differences” is to highlight that there may be (at least) four factors weighing down on MIA prices that might suggest even lower YOY forward gains (HPA?) are appropriate.

The four factors (all teed up with links for your more detailed consideration, and to prompt discussion) include:

Overvaluation -The most recent CoreLogic HPI/Valuation Report notes that “Miami metro tops our list of most overvalued” (markets).

AirBNB -a recent CNBC report (later highlighted by Real Estate Investing Today) detailed how Miami Beach is cracking down on short term rentals (e.g. AirBNB).  While there may be public housing policy interests related to affordability, various academics have noted that introduction of AirBnB-type rentals has tended to increase home prices. (See “Do Airbnb properties affect house prices?” (Shepard/ Udell -Jan 2018) as one example.)

Eliminating Dirty Money -A Miami Herald article in May 2018 noted how the Treasury Department was cleaning out the dirty money in Miami real estate.  Anecdotes of shell company buyers paying cash for newly constructed luxury condos, and thereby driving up the value of other Miami home prices (as Case Shiller doesn’t capture first-time sales), have long been part of the Miami Beach real estate lore.  (Note that the Economist recently called for the City of London to do the same).

Climate Change –Miami Agent Magazine reported in Jan 2018 (highlighting a Union of Concerned Scientists report) that Miami Beach is “the most at-risk city for sea-level rise in the country”.  (This may have something to do with “global warming” or what State of Florida officials have to might refer to as “atmospheric re-employment” for fear of punishment.  BTW- the two-minute video highlights some excellent verbal gymnastics.)

Given the four factors,  I’d be even more inclined to take the short side of any trade involving MIA contracts (e.g. outright trades, calendar spreads, shorting calls, intercity spreads).  While I appreciate that all of this news is already in the public domain, it’s been argued that home prices (and maybe home price futures?) tend to react less immediately to new information.

Any longer-term MIA bulls out there, or potential buyers at lower levels?

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

Thanks, John