Recap of activity in CME Case Shiller home price index futures for Dec.

I’ve posted my recap of activity for CME Case Shiller home price index futures for Dec 2018.  In addition to monthly activity, there are some tables showing YTD trades.  You can find the recap in the Reports section or access here.

December was the most volatile month (in at least the last 24) as noted in these comments from the summary page:

–There were 10 futures contracts traded in December, across 4 expirations, and 3 regions (DEN, NYM and SFR).  This brings the 2018 total to 110, which I’ve broken out in a table on the Volume page (#11).  SFR contracts dominated 2018 with >50% of all trades.

–Market prices collapsed across all regions and expirations with biggest declines in longer exposures and in 3 Calif contracts (LAX, SDG, and SFR). (For example, bids were >10 points lower in LAX, SDG and SFR X20 (Nov 2020) expirations.

–Forward curves went negative (i.e. forward price lower than spot) with 7 of 11 regions having lower mid-market levels in G20 (Feb 2020) than G19 (Feb 2019).   See SFRX20 chart (on page 9 and comparison of G19 (Feb 2019) vs G20 mid-market quotes (on page 14).

–Outright bid/ask, Intercity, and Calendar spreads expanded dramatically on uncertainty of forward HPA.  All such spreads are at historically wide levels.

–There were no options trades in 2018 after 45 in 2017.

–I am eager to facilitate an option trade as last open contracts expired.

–I’ve added a table of contents, which I’ve posted below the blog, so that you can have an idea of topics covered.

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

Table of Contents for Dec 2018 Recap:

Page/ Content

  • 5- Price Changes –last month (summary/ 3 contracts)
  • 6- Prices Changes (8 contracts)
  • 7-Volatility of Price Changes picking up
  • 8-SFR contracts following tech stocks lower
  • 9-Curve inversions/ implications
  • 10Bid/Ask Spreads
  • 11– Volume
  • 12-Open Interest
  • 13-Feb ’19 markets (2018 performance)
  • 14-G19/G20 Calendar spreads (one year forward HPA?)
  • 15-YOY forward % changes/ HCI contract
  • 16-YOY forward % changes (CHI, LAX, NYM, SFR)
  • 17-Nov ’19/’20 Candle graphs
  • 18-Calendar Spreads for HCI contracts
  • 19-InterCity Spreads (X20)
  • 20-One year puts
  • 21-OTC quotes “other 10 regions”
  • 22-Disclosure issues

CME home price index futures_post Case Shiller #’s

CME contract prices are marginally higher post this morning’s Case Shiller #’s (see Mid-Mid change in table below) with NYM up (on substantial revisions to the last month’s index values) while SDG remains under pressure.

However the change in prices over these two days is not the headline event here for the month, or even the week.  Contract prices have collapsed (e.g. with bids on SFR contracts beyond 2020 falling by more than 10 points, and offers lower by 6) somewhat in sympathy with the stock market “correction” (air quotes).  The increase in stock market volatility, and uncertainty about where that market will stabilize, has seen bid/ask spreads in this market widen across all expirations.  Most notably, as I wrote about in my Dec 21st blog  forward prices had begun to invert (i.e. forward prices lower than spot).  That trend has moved beyond the SFR contracts to most regions, and the degree of inversion has become more pronounced.

To be clear, most of these quotes are mine (although other traders are contributing to LAV, NYM and SFR contracts).  My approach has been to (try to) bias prices lower seeing as most inquiries are coming from people who now want to hedge.  The key questions for viewers of these quotes are: 1) is the decline in prices an over-reaction to the stock market,  2) will the inversion in the back end become much steeper if the S&P drops below 2300, and 3) which regions are going to be more/less impacted by demand for hedging and/or stock market decline.  I hope to write a blog latter exploring the parallels to the last housing crash with the idea of differentiating those cities that performed like Dallas in 2006-08 (almost unchanged), or that fell the hardest (e.g. LAV).

I’d appreciated feedback on market quotes, people’s views on forward prices, and ideas for trading.  Volatility often creates opportunities to get things done that might not happen in a more stable market.  Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog, or if you’d like to brainstorm on the three questions posed above.

Thanks, John

 

 

 

Inversion in SFR Home Price Futures (Declining Prices?)

For the first time since at least 2012, a trade has caused home price futures curve to become inverted (i.e. forward prices closing below spot).  The graph below illustrates that the closing price of 268.6 on the SFRX20 (Nov 2020 expiration) is lower than the spot index value of 269.21.  The SFRX20 close has fallen 16.4 points (or ~5.75%) from the high of 285 last seen on Oct 8.^1

While traders can bid/offer/trade for  variety of reasons, one component might include expectations of future index levels (as the contracts settle on index values at expiration).  So, while many year-end forecasts are calling for gains in SFR over 2019-20 (and to qualify, possibly on other, less volatile home price indices) this market is priced consistent with a more bearish outlook.   As I’ve argued before^2, price changes on futures contracts may include a component of forward expectations, making them much more useful than spot indices for predicting the future.

Some notes:

  • Most of the activity in the CME Case Shiller futures has taken place in the SFR contracts, so prices may be a little ahead of other regions.
  • This market is thinly traded.
  • The SFR region has long been viewed as over-priced by some analysts (e.g. when using income-based metrics), and support for home prices may be more influenced by changes in wealth (e.g. appreciated shares in Silicon Valley companies).  (See next week’s blog for more on this.)
  • Some regions (e.g. CHI) have been inverted before,  but on quotes, not a trade
  • The last time forward contract prices were most inverted was during the 2007-08 housing crises.
  • Finally, some of the strongest housing markets (e.g. Seattle, Toronto, Vancouver, Sidney) have also seen prices drop, so an outright reduction in SFR prices would not be an outlier.

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-The longer dated SFRX22 (Nov 2o22 ) contract has fallen ~6.75%

^2-https://www.homepricefutures.com/diagram-to-reflect-changes-in-forward-sfr-markets/

Pulsenomics survey: Why are surveys results more bullish than Case Shiller futures?

The quarterly Pulsenomics survey results for Q4 have been released.  (Link here.) I consider this to be the best overall survey of home price expectations as it is broad (with ~>100 contributors -and for fair disclosure, to include me), consistent (in that the format has remained the same), historical (in that the survey results go back years), and current (as the survey is done 4x/year and these results were compiled in the last 30 days).

That said, I continue to observe that the survey results tend to be more optimistic than implied by the CME Case Shiller home price futures, and remain frustrated that those with outlier views (in either direction) won’t take a nominal position.

The bar chart below shows the distribution of 95 forecasts for the cumulative gain of the ZHVI (Zillow) home price index value for 2019-2022.   (I truncated the 2018 forecasts to come up with these numbers.).   The results have a mean value of 12.15% (with a median of 12.77%) and a standard deviation of ~8%.  Consistent with that, 74% of the forecasts are between +5% and +20%.

I’d note that at the time this survey was being taken (Nov 5-18) the CME HCI (10-city index) contract for Nov ’22 had a mid-market value that was about 2% above current spot levels.  This pattern, of CME futures quoted well below consensus Pulsenomic survey results, happens almost every quarter.

Now, with full acknowledgement that the indices are different (ZHVI vs HCIX22), that the time frames are slightly different (2019-2022 for Pulsenomics survey vs. Nov ’18 vs. Nov ’22 for CME futures), why might this difference persist?


 The Zillow and Case Shiller methodologies differ, although both try to capture changes in home prices.  It’s no surprise then the both indices are 45% above a past value (Sept. 2012).

The graph below (showing YoY percent changes of each index) illustrates that the Case Shiller indices have been more volatile than the ZVHI index.  As such, housing bulls (e.g. those looking for >10% gains over 2019-22) might expect the Case Shiller 10-city index to out-perform the ZHVI index.  

I’d note that the CS 10-city index has more of a coastal, urban base, which may be more at risk to changes in SALT (State and Local Tax) deductions.   Further, should waves of Millennials move from the cities to the ‘burbs to set up house and have babies, national versus 10-city indices might out-perform.  Finally, Core Logic economists project the Case Shiller indices to underperform. Net, some outperformance of a more national index may be plausible.  The question remains how much?  Is the difference between the CME mid-market price of ~2% gains (from 2019-2022) versus the ~12% gains from the Pulsenomics survey (and other forecasters), or more than 2% per year, justified?

My sense (belief) is that the CME markets may be skewed by the (very limited) number of participants involved.  That is, while I hear from many “natural” hedgers (e.g. those with more than one house, or those looking to downsize), I do not hear from many natural longs.  Such longs might include overseas investors, Millennials who have not yet bought a house, and pension plans and insurance companies who tend to be underweighted in their exposure to home prices.  As such, at this point in the real estate cycle, the longs may be more speculative in nature, and may need an incentive -i.e. a discount from “fair value” or expected levels -to induce them to participate.  

With the markets being so thinly traded, I’d expect the discount (between Pulsenomics and CME prices) to narrow, should natural longs show up to the CME forward market. I’ve written earlier about how futures prices might be an alternative to Fractional Interest programs.  In addition, futures (or OTC forwards) might be a good way for Millennials looking to hedge partial exposures to the areas where they might eventually want to buy.  Both might be avenues that bring natural longs to this (and other home price index markets).

For now, longs are price setters, able to get whatever discount the hedgers will pay, but taking on positions that are difficult to hedge.  Speculators -particularly more bullish housing economists -might consider speculative longs, before the discount shrinks.

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

Thanks,  John

 

 

Basics -How to start trading CME Case Shiller futures and and options (for retail accounts)

After multiple inquiries, I thought that I’d pull together my responses of FAQs related to “how do I trade CME housing futures” into one blog (that I will update over time).  If anyone has ideas that would improve this list, please feel free to contact me (johnhdolan@homepricefutures.com).

Understanding Reference Obligations: 

  • To trade any future it’s important to know how the reference obligations (in this case the Case Shiller indices) are calculated.   There is a write-up of how the Case Shiller indices are calculated in Reports section, or you can access here.
  • There are many different home price indices that perform differently due to either geographic coverage (broader vs. more narrowly defined), inclusion in index (e.g. repeat-sales vs new sales, those with FHFA conforming mortgages vs all homes), seasonally adjusted (or not),  and/or calculation method (e.g. repeat-sales vs. hedonic).    Note that the CME contracts reference the Case Shiller NSA (non-seasonally adjusted) indices which are based on a repeat-sales methodology with geographically wide coverage areas.
  • Trades referencing other indices can be done but in OTC (over-the-counter) contracts.

Format of Futures Contract:  There is “An Introduction to Case Shiller Futures” in the Reports section( or you can access here)  that should help explain the structure of the contracts. Some key highlights include:

  • There are 11 regions (one for the Case Shiller 10-city index, and one for each of the ten components),
  • Each region has 11 expirations.
  • Each point is worth $250 so the notional value of a contract priced at 200 is $50,000.
  • Contracts expire on quarterly cycles of G (Feb), K (May), Q (Aug), and X (Nov) months.
  • Contracts settle on the index value released in the settlement month (the last Tuesday).

Margins/Fees: 

  • The CME establishes minimum margins (both upfront and maintenance) that your broker might make larger.  That said, my sense is that margins have been running <5% of the notional value of a contract.
  • Each brokerage firm has their own fees for trades and other services (e.g. wiring funds).
  • Best to allow some time before first trade to open account.

Account Opening:

  • You need an account at a futures broker that allows their clients to trade the Case Shiller home price index contracts.
  • Their role will be to screen for suitability, and  KYC issues.   (I’m not aware of any licenses required by users to trade).
  • Any trade you execute will have the CME as counterparty (so I’m not your counterparty on CME trades).
  • I’m aware of two firms – Interactive Brokers and Insignia Futures -that allow trading in outright CS futures for individuals.  IB is a good platform for those comfortable placing orders electronically.  Insignia (contact Joe Fallico) is better if you need human involvement (but they also have an electronic platform).
  • Insignia allows trading in a broader range of orders to include: inter-city and calendar spreads, as well as options.
  • Please let me know of any other firms that will allow retail to trade these contracts and I will alert CME and post to my website.

Futures contracts:

  • I try to make sure that there is at least 1×1 (one lot bid vs. one lot offered) across all contracts out to about the 7th expiration (today X20) via quotes from me or others.
  • At present, many will be mine, but anyone can post a bid or offer.  My sense is that the 1×1 market helps in “bracketing” bid/ask discussions, as well as creating graphs.  On some contracts (typically the 10-city index, CHI, LAX, and SFR contracts) there have historically been quotes in longer-dated contracts.

Trading: Here’s a few ideas on how to approach placing futures orders:

  • Since many markets today are quoted 1×1 I strongly advise not to place market orders for more than than the amount bid.  This is currently a thinly traded market with often limited depth to the bids or offers.
  • Please feel free to contact me if you’d like to discuss trading more than one lot.  I may have interest at (or inside) posted levels for up to 10 lots.  Several of the 5-20 lot futures/option trades that took place over the last few years (particularly in options) started this way.
  • Note that my interest is as a trader.  I am not offering guidance or financial advice.  While the CME is the counterparty, I may be the person taking the opposite position of yours.
  • I’m happy to network/market/blog/tweet any trading axes for larger orders.   (Thin hub-and-spoke information model).   Feel free to sign up for blogs on my website (www.homepricefutures.com), tweets (@HomePriceFuture), or send me emails (johnhdolan@homepricefutures.com).  In the past, smaller trades (e.g. 5 lots) were useful for prompting discussion, and narrowing bid/ask spreads -key to bringing in traders who might be willing to trade larger sizes.
  • My sense is that a disproportionate share of trading seems to take place in the first and last hour of trading days, particularly on days when information that might have more of a direct impact on home prices is released (most notably the two days before and after Case Shiller #s are released.)
  • The minimum quote increment for futures is 0.2 (=$50), and for options is 0.1 ($25).
  • Some vendors describe the 10-city contract using the symbol HCI.  Some use CUS.
  • Calendar spreads may be quoted differently (i.e. with signs reversed) on different platforms.

Options: 

  • Options (both puts and calls) can be traded on any region, for any 5-point strike, for any of the 11 expirations.
  • Given the 1000+ option permutations, I tend to only post live quotes on 10-20 contracts.  Those posts are concentrated in areas where I’ve seen the most interest, namely 9-18 month term puts where the strike is about equal to the spot index.
  • The Case Shiller options are options on the futures contracts -not options on the index.
  • Options are exercisable European-style (i.e. at settlement).
  • I’m open to proposals on many types of option strategy trades.
  • While there was a lot of option trading when the contracts were introduced in 2006, volume has collapsed.   That said, I believe that options may be a very useful fit for retail clients as total exposure (for buyers) is known upfront.

I hope that this is enough to answer many “how to get started” inquiries.  As noted above, please feel free to contact me if you have ideas: a) on how to improve this post, or b) any trading ideas.

Thanks,

John

 

 

 

Diagram to reflect changes in forward SFR markets

The graph below may be the best way of illustrating several  points that are key to understanding home price futures, as well as the current debate over home price expectations:

  1. All home price indices (including Case Shiller) measure events that have taken place a couple of months ago.  Since traders often incorporate changing expectations, futures prices may go down (or up) while index values are rising (or falling).   As the graph shows, the SFR (San Fran) index slowly increased in all but one month since Nov 2017, while the SFR X20 (Nov 2020 expiration) and X22 (Nov 2022) contracts rallied until about Sept 1, and then collapsed.  As such, there may be useful, more-timely information in such forward-looking markets, that is not captured in published indices.
  2. Futures prices are public, are updated in real-time, and are posted by traders willing to financially back their views.  As such, they differ from periodic forecasts.  Both may be useful (and more so, if markets are deep and liquid).  The press and analysts, should pay more attention to futures prices.
  3. Futures prices have to converge to index levels as the contracts settle on some future (albeit unknown) index value.  The graph of the SFRX18 contract and the CS SFR illustrate this convergence.  Recall that the data for the Nov ’18 settlement includes home price activity from July, August and September.  As such, (particularly on such shorter-expiration contracts) expectations of future index values should dominate pricing of futures contracts, as subsequent events (e.g. stock market falling 200 points in October, can’t impact past index calculations).
  4. At times, longer-expiration contracts may be more volatile than suggested by standard risk metrics.  (See August-Sept 2018 section in graph.)   This has implications for pricing longer-dated options.
  5. The difference between curves may be consistent with views on forward HPI.   The ~20 point difference between the X18 and X22 contracts in mid-year may have been consistent with ~3% HPA assumptions over the next four years.  By contrast, today’s X20/X22 prices have fallen due to changes in views that may be more consistent with <1% HPA.  A key debate in these markets is whether the forward premium collapse is due to more negative forward sentiment, or just the old “more sellers than buyers” adage.   (BTW -The curves may go inverted -i.e. with longer-dated contracts trading at a discount to either spot or front contracts – as was the case in 2008.  Such pricing would be consistent with negative HPA.)
  6. Hedging works.  Note that someone in May -July, looking to lock in market-implied HPA of ~3%, could have hedged spot SFR exposure with longer-dated SFR contracts, and made money on both sides as longs rose in value, while shorts fell, as HPA expectations collapsed.

Now I can’t make the above statements without adding some qualifiers and observations, that also speak to understanding trading these futures, and how one might interpret prices.

  1. These markets are thinly traded.  In the three contracts shown there may be have been weeks without a trade.  “Closes” can change without a trade as they are (at CME) a function of last trade, a lower offer, or a better bid.
  2. Traders may buy or sell (or post bids and offers) for a variety of reason beyond their expectations of future index values.  For example, traders may be looking to hedge real estate (or other) exposures, or sense that sentiment will grow more negative.  Given the lack of depth, the arrival of larger new contract buyers or sellers, may put upward/downward pressure on prices, unrelated to expectations.
  3. I tend to show 1×1 “actionable” quotes (one bid versus one ask) to form graphs, narrow bid/ask debate.  I may be aware of more interest, at, or inside bid and offer, but may not show (or keep live all day/week).  As such: 1) please refrain from market orders that are bigger than amount shown, and 2) feel free to contact me if you’d like to share ideas.
  4. The CME Case Shiller futures contracts seem to react most notably to infrequent events -e.g. monthly updates to index values, announcements on home sales, S&P 500 index changes of 50+ points.  More trading tends to take place on such days, but otherwise prices tend to be quiet and trend/drift in-between with limited trades.
  5. Most trading seems to take place in the first 30 minutes and last hour of the trading day (the former often coinciding with economic updates).   A trader looking to get something done should appreciate (IMHO) that there will be more eyeballs on the contracts at those hours.

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

Thanks,  John

Recap of Nov activity in CME Case Shiller futures

My recap of activity during November in the CME Case Shiller home price index contracts can be found in the Reports section, or accessed here.

The key notes for the month include:

–There were 11 futures contracts traded in November, across 4 expirations, and 3 regions.

–Activity (bids/offers/trades) remained higher than recent (6-month) history.

–There were no options trades.

–Bids and offers fell for the second month,  across most regions (NYM was the exception).  The three West Coast contracts (LAX, SDG and SFR) saw the biggest declines (and the most activity).  While the contracts have tended to move in the same direction, the individual markets appear less correlated than the run-up from 2016 to early 2018.  The West Coast markets are under the most pressure, while LAV, NYM and WDC are showing reasonable support.    There might be some interesting opportunities for inter-city spread quotes between two markets, rather than just the HCI vs. regional markets that I tend to quote.

–Forward curves continued to flatten with some calendar spreads in longer-dated expirations bid at negative spreads (i.e. sell front contract/buy back one for a lower price).  (Watch for next blog with neat graph illustrating the point).

–Bid/ask spreads narrowed slightly across all regions except WDC.

–With the expiration of Nov ’18 contracts, OI on futures fell from 49 to 32 –about average for the last four post-Nov expirations.  There are only 4 OI before Nov ’19,  the weighted time to expiration across OI is>2.0 years (for the first time I can remember), and inquiries are rising,  so I’d expect OI to grow over the next 9 months.

-I added a page updating proposed quotes on CME indices other than the 10 traded on the CME.   I am open to structuring either a forward trade, or a (European-style) option on other home price indices.  Please share any interest in what other indices you might like to trade.

–I am eager to facilitate an option trade as last open contracts expired.  (I posted a table of two-sided quotes on one-year puts in the report, but am open to other strikes and expirations)

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

Thanks,  John

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 (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price index exposures.

Footnotes:

^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 (johnhdolan@homepricefutures.com) 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 (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price indices.

Thanks, John