Redfin recently published a great piece that detailed how some residents look beyond their local area for their next house. They noted that many many people in a region look at the same next cities (sorted both by in-state and out-of-state searches) with certain marked preferences. For example, many LA residents eye San Diego, New Yorkers frequently consider Boston, and Denver homeowners seem to covet Seattle’s low taxes.
The graph below (from Redfin) show the net flow of users searching for other regions. (Net flow is the number looking to leave versus the number looking to take up residence). Seattle has recently re-taken the award for most people looking to move there, while Denver residents are looking elsewhere in larger numbers. This is interesting data to those who believe that population flows are a key component to changes in home prices.
Residents moving from one region another may face the risk that home prices will fall where they live, while rising where they want to move. Fortunately, my analysis suggests, and other research confirms, that home prices on many of the common pairs that Redfin identified are highly correlated, using region-wide measurements. ^1 For example, using YOY changes in Case Shiller indicies, the LAX, SDG and SFR regions have all been >90% correlated since 2013.^2,3 Surprisingly (to this former Connecticut resident now living in DC) the correlation across the three Northeast regions is not as strong, ranging from as low as 43% between NYM and WDC, to >75% between BOS and NYM and WDC.
For those in the later categories, intercity spread trades may be a useful tool for going simultaneously short futures on the region they’re leaving, while going long on the region to which they hope to move.^4 In effect, users might be able to hedge some of the risks of their move.
The table below lists (on the left side) the top 6 interstate 2018 transitions highlighted in the Redfin highlighted report. (I’ve added the intrastate move from LA to San Diego, as there are CME contracts on both). While the Redfin article has much more detail on the net number of people moving, my contribution to this discussion is to share how the CME markets (using the Feb ’20 contract to capture 2019 year-end values) might be used to possibly hedge these moves.
First, here’s a few explanations and observations:
Finally, I’ve added levels where I’d be open to an intercity spread trade. For example in the NY to Boston move, the difference between the NYM and BOS “Mid/ Spot -1” numbers is 1.85%. Since both regions have a CME contract, I’d buy a NY contract while selling a BOS contract (a pair someone moving might be interested in ) where Boston outperforms NY by 3%, or go the reverse (buying Boston/ selling New York) where Boston outperforms by 1%. (See example below).