I've started to incorporate my use of HPHF Ratio Agreements into my Single City template to better illustrate relative performance trends in a CME Case Shiller regional contract vs. the (HCI/CUS) 10-city index contracts.
For example (using SFR as an example), in addition to listing recent quotes (top table), and a graph of index values vs. contract bids and offers (graph in the middle), I've added the ratio of the SFR/HCI index. The black line is historical ratio (going back to 2012) with year-end values (released in February) highlighted with red squares. Note that from 2012-2018 the SFR index was "outperforming" the 10-city index as the ratio was increasing. The 0.33 point increase in the ratio (from .93 to 1.16) was a gain of 35.5% or about 4% excess return per year.
However, since 2018, the ratio has been ~flat, consistent with both indices moving in lock-step. (In fact the SFR index is up 36.7%, while the HCI index is up 36.4% since the Feb 2018 release).
The key question for this market is where is the SFR/HCI ratio headed. I pose the question as changes in housing preferences since Covid seem to be most pronounced in SFR. To begin, prices were high relative to the rest of the country, and affordability was low, but great weather, job opportunities in Silicon Valley and the cultural "vibe" of SFR justified higher prices to many. However, the tech community -more than almost any other sector -has demonstrated that they can work remotely, and may have no reason to even come back. Instead of staying in hacker hostels in Palo Alto from Monday to Thursday, some programmers can now relocate to cheaper cities (e.g. Sacramento) and, with lower home prices, get space of their own. Further, SFR has probably had the combination of one of the largest income inequalities in the country, combined with a very liberal tolerance for those who can not afford to live there, resulting in one of the most visible homeless situations on downtown streets.
Net, the reasons to stay in SFR may be eroding.
While I've been trying to express those views in SFR forward contracts, it is not straight-forward to see in outright prices. However, the ratios in the bottom graph make the point that futures prices for SFR are consistent with a drift toward relatively lower performance than for that of the HCI (10-city index). (Note that the graphs highlights the bid or ask side of the SFR Feb '23, '24 and '25 contracts divided by the mid-market values of the corresponding HCI (10-city) index contracts).
A recent trade in the SFRG25 (Feb 2025) suggests that readers are willing to debate the outlook for SFR beyond the typical interest in front (or one-year) contracts. I'd be eager to facilitate that discussion, and have posted bids and offers to stir the pot.
While traders can express views in the outright SFR contracts, there may also be users that just want to express a view on SFR v HCI. The CME hosts intercity spread trades (where one can simultaneously buy/sell a regional contract while taking an offsetting position in the HCI contract at a negotiated spread). This may be a useful way to later take a negative absolute price view on SFR as traders will likely find it easier to sell HCI contracts. That way being short the SFR/HCI spread, and then short HCI, will translate into an outright short on HCI.
I'd be happy to walk those interested in a such a spread trade through the mechanics or to orchestrate simultaneous buys and sales.
Please feel free to contact me with comments on this blog, to weigh in on where you think SFR prices are headed, to express a view via a trade, or to just learn more about how to use home price index derivatives in hedging decisions.
Thanks, John
