Inquiries from traders looking to hedge (sell) housing futures (or buy puts) continue to dominate. As such, I’m (unabashedly) putting forth an idea to try and bring in some interest from the long side (on forward contracts).
First, the graph below shows the closing prices on the Nov ’17 contracts for the S&P 500 contracts vs. the CUS 10-city index. As such, this is a comparison of futures vs. futures for the same expiration.
As I note in the titles for the vertical axes, the S&P contract is up 19.7% over the last two years, while the CME CUS-10 city futures contract is up only 1.7%.
As you’d expect from eye-balling the graph, there is a low correlation between the two markets. If I use daily changes, the correlation is ~25%, but if I use discrete 20 business day changes, the correlation drops to about ~10%. Net, one would have been quite diversified.
Second, if one looks back further, the SPX cash index is up over 80% over the last five years.
Finally, (in highlighting where I need to cultivate interest on the long side) the forward CUS contracts (e.g. those that expire in Nov 2018-2020) have mid-market values that are only 3.2%, 5.2% and 6.8% above the mid-market of the Nov ’17 contract. My sense from public pension consultants is that the “experts” are projecting 5-6% gains per year on the stock market.
Taken together, home price contracts: a) have lagged gains in stocks, b) seemed to be priced for low gains going forward, and c) have demonstrated low correlation to stocks. Net, for anyone thinking that stocks may have risen too far, or for too long without an interruption, housing contracts may be worth exploring. (Note that the CUS-10 index has a higher weight to more urbanized areas.)
Now, an alternative view is that corporate America (as reflected by stock prices) has out-performed, and will continue to out-perform home prices. Clearly if robots replace all workers, or if all jobs are shifted overseas, there’ll be few people to buy homes. In addition if overseas profits are repatriated, or corporate tax rates cut, cash flow to companies should improve. Those fears (and the prices of homes vs. stocks) highlight the 99:1 divide in society (a topic for a separate blog).
However, while those themes may be in vogue, there’s always a danger that they are more-than-priced-in to current stock values. Taking outright home price exposure, or writing puts on home price options “may” be a way to take an uncorrelated counter-view on today’s market sentiment.
My sense is that the CME housing contracts represent one of the best public “pure plays” on home prices. By contrast, bank stocks have other risk, and builder stocks are impacted by input costs (e.g. tariffs on Canadian lumber), labor costs, and local zoning.
Feel free to contact me (email@example.com) if you’d like to discuss these themes. While volume has been extremely low in the housing contracts, my sense is that a programmatic long might be able to accumulate open interest at attractive levels.