An open letter to NAR conference attendees

As you meet and great fellow members in San Diego this weekend, and participate in the continued learning that conferences offer, please consider spending ten minutes developing a quick appreciation of the concept of home price index hedging.

I can think of two reasons that should be important to you to allocate some time to the this topic:

1) It is a tool that you should be aware of, and be able to explain, to your clients who have either:

a) bought a house (and might be looking to hedge),

b) are worried about putting too much of their financial exposure into one asset (i.e. the purchase of a new home),

c) are planning to buy a house in the future (but are worried about prices getting away from them), or

d) are considering moving from one region to another (e.g. sell up north to retire down south), or transferring locations for business, and are worried about the risks of selling in one market and buying in another.

I agree that real estate valuation is governed by "location, location, location" but think of that mantra in terms of MSA, Neighborhood, block.  I'll leave the last two themes (Neighborhood, block and will throw in individual home) to your expertise, but please appreciate that there are macro/regional risks that impact home prices, but that can be hedged. Your clients might want to learn "how".

Further, the contracts have relatively small notional values, allowing users to spread their decision-making over time, and/or to partially hedge. (see  Benefit of Bite-Sized Exposures

2) Your own income is probably highly correlated with home prices, and you might want to personally hedge against the risk of a downturn. That is, when home prices rise, sales are brisker, and fee commissions are higher, but what's been your experience (or what are your concerns) should home prices go flat (or even fall)?

I make no claim to being able to predict home prices (leaving that to Lawrence Yun), but I do have insights on how those with exposure to home price moves might have a need to hedge, as well as how they can hedge.

The graph below shows the historical path of the Case Shiller 10-city index, as well as quotes (bids, offers, and closes) for the Case Shiller home price index futures that I trade on the CME (Chicago Mercantile Exchange). (Similar graphs are available on the ten regional contracts quoted on the CME, and there are other forms of hedging for other cities).

Not only does the graph illustrate that index values have moved up (but you knew that), but it also shows how much the futures have risen (comparing the green triangles, to the purple line for closes.) So, when somebody asks "Do future work?", you can point to the ~50 point gain on the Feb 2022 contract. That is, had someone (possibly looking to eventually buy in 2022) bought 5 contracts (with notional value of about $312,000 at the time), they would have had a gain of $60,000. That might have gone a long way toward helping with the down-payment this year.

The graph also highlights that clearing levels rise from 2021 to 2022, from 2022 to 2023, and so on. Appraise any skeptical clients that these "projections" of higher index values are not opinions, but contracts where the users back up their views with their own capital. That means that someone looking to hedge against where prices might move 1-3 years from now, could set a hedge ABOVE current spot index values. That is, if home prices are flat for the term of their trade, they gain.

I can think of no other public, transparent platform for you, or your clients, to consider when thinking about hedging macro home price risk.

If you're interested, I encourage you to visit my website, in particular two other posts on  Case Shiller Futures -Introduction , and Blog (April 2019)-How do I get start trading CME Case Shiller contracts?

Feel free to contact me (and subscribe to my blogs -on "Contact Me" page) if you have any questions on this blog, have hedging ideas you'd like to pursue, and/or want to learn more about how home price index derivatives can be used in hedging strategies.

Enjoy the conference!

John