I've been iterating my way through changes in the HPHF Ratio Agreement ("RA") template, trying to create a version that includes housing economic data, as well as forward index prices as indicated by HPHF RAs. The table below is the template that will show up in X/Twitter feeds. For example, on April 8th, I used Dallas (DAX) as an example.
The key illustration is the graph to the left. it shows (in black) the RA between the reference metro (here the Case Shiller DAX) and the national index (in this case the Case Shiller 10-city index). (I've highlighted year-end values with red dots to dampen seasonality issues.) In this example, Dallas moved in sync with the 10-city index from 2017-2021, before having ~18 months of outperformance. However, since late 2022, the ratio has been in decline as gains in Dallas home prices lagged the CS 10-city index. (See box at middle left for last year's price changes).
The blue diamonds are my indicative implied bids on this RA for index updates in Feb '25, '26 and '27. The red squares are indicative implied offers. The blue bars are the floors on the RAs, while the red bars are the caps. (See this blog for an overview of HPHF process.) The mid-market of these RA levels rise only slightly YOY (shown to the far right), and are listed in detail at the bottom of the illustration. In this case such gains are consistent with Zillow's home price index forecasts (lower right box) but at odds with 2023 performance (lower left box again).
The table to the upper right takes the quotes on the RAs (for DAX/CS-10), and multiplies them by the values for the CS-10 city index contracts that are traded (by me) on the CME, to come up with implied prices for DAX forwards. Note that this is the key "value add" of expressing regional prices as RAs. That is, the RAs can be combined with the outright CME 10-city index futures to create a quasi-outright long or short in the regional index. (A key qualifier is that the combination is not equivalent to an outright long if the cap or floor on the RA is hit. Tighter floors and caps minimize the up-front out-of-pocket (the option fees) but increase the likelihood that floors and caps could be hit. Floors and caps are negotiable.) As such, the outright DAX forward levels are impacted by changes in the CME 10-city index contracts. The importance of having deeper, tighter benchmark markets in the 10-city Feb contracts becomes even more apparent.
Net, DAX index levels are priced (at least via this process) to rise in '25-'27. Note that this was not the case when 10-city futures for Feb '25-'27 traded at a discount to spot last year. Note also, that the CME contracts, as well as the DAX RAs and implied forwards, may not correspond to home price forecasts/expectations. The levels at which risk might transfer are a function of supply and demand, and historically, IMHO, the contracts have typically traded at a discount to expectations as there have been more natural sellers (e.g. homeowners, house flippers, builders) looking to hedge than natural longs looking to buy. (Blackrock, Fidelity, let's change that!).
A new section, just below the graphs, includes key housing economic metrics from Zillow (which I intend to update them monthly), and compares any region with national information. These are all some of the factors that might influence a user's view on whether to add/reduce exposure and puts the RA quotes in context. For example, rent growth in Dallas has been slower than average (see multifamily absorption) , but sales are much higher, and inventory has fallen. Days on market (DOM) is mid-range (will add National on next iteration) and the change in the % of properties with price cuts has fallen. (Want to see other/more economic indicators?)
Net, Zillow has (had as of last month) Dallas outperforming for the next year, but different economists will have different forecasts. I don't pretend to know more than Zillow, but I do know that there is a need for hedging, and this template (and the ability to enter RAs) might help.
Finally, the details for the Feb '25-'27 Ratio Agreement pricing are presented in the section below the economic data. I've added bid/ask spread on each RA (which gets wider as expiration extends). The distance for each floor and cap from my suggested mid-market level, is also shown, and also gets wider with time.
I appreciate that there is a lot of data on the page, so please feel free to DM me if you have any questions.
This example creates RAs of Case Shiller indices over CS indices (which may be particularly useful on the ten public Case Shiller indices that are not referenced by CME contracts -e.g. Atlanta, Cleveland, Charlotte, Detroit, Dallas, Minneapolis, Portland (Ore.), Phoenix, Seattle and Tampa). However, I've also been posting (on X/Twitter) RAs referencing Freddie Mac indices, some of which are listed here, and at https://www.homepricefutures.com/resources.
Being able to reference Freddie Mach home prices is helpful as there all the Top 50 Metros are covered. See a recent blog for an example.
Of most importance to me is to be responsive to any hedging strategies on metros that users would like to see. Let me know what metro you have in mind and I'll add it to my posting (aiming for 3 per week).
Thanks,
John