Some recent articles on home prices have had pundits calling for 20%+ declines in home prices (from the peak). In addition, bidders suffering from sticker-shock have remarked that they are waiting to buy when prices are 20-25% lower.
Get ready, you already can (sort of).
That is, as shown in the table below, one might use the CME home price Feb 2024 futures to add exposure to the Case Shiller SFR (San Francisco) index at 25% below the peak index value (released only two months ago). Other areas that saw recent large home price gains (e.g. DEN and LAX) also have contract offers that are ~20% below peak values.
Why wait to buy in the spot market when you can buy that exposure (in more granular, more liquid format) today!??
Recall that IMHO the contract prices represent levels where risk clears, not necessarily expectations of future index values. However, with so many people looking to sell (to hedge), clearing levels might be below expectations. As such, someone looking to "buy on the dip" can gain access to the index (for some future date) at the levels they hoped to buy.
Further, I'm citing the Feb 2024 (G24) contract as a) that is the low price in the forward curve, and b) I'm trying to steer anyone interested in the contracts to the February expiration cycle (and Feb 2023 is too close).
Now while SFRG24 offers are 25% lower than the peak value (down ~100 points!), note that the SFR index didn't rise above 294 until April 2021. That is, a 25% decline in the index would wipe out ("only") ~18 months of gains. Sellers may be offering SFR contracts at 294 for a variety of reasons, one of which may be that the seller thinks that prices are going back to below levels from some even earlier date in time.
Of course contract prices can fall further, and owning the index is not perfectly correlated with the home a buyer might be keen to purchase, but if you believe that local prices move with regional values, this might be a way to gain exposure at the targeted discounts. That is, if (having bought an SFRG24 contract at ~294) the SFR index does eventually fall 25% at the Feb 2024 expiration, you'd be about break-even on the futures, but be able to buy your home at then lower prices.^1 On the other hand if index values expire at only a 10-15% discount from the peak value, you'd likely pay more for the targeted home, but would have gains on the futures to somewhat offset that higher cost.^2
An advantage of using the Case Shiller futures to access exposure is that users can avoid the binary "100% Rent v Buy" decision. (See blog for themes). That is, each contract has notional value of $250/point. So, at a price of ~280, the HCI (10-city index) contract has a notional value of $70,000. One could "put their toe in the water", or dollar average toward eventual exposure without having to worry about perfectly timing when to take exposure.^3
Bid/ask quotes on these Feb '24 futures are historically wide for contracts with < 18 months to expiration, but that likely reflects the one-sided nature of inquiries during this sell-off. Part of my interest in posting this blog is to prompt price discovery, and I would imagine that bid/ask spreads will tighten after the first few trades. I'm open to bidding/offering at tighter levels (in response to inquiries). Users can also post bids at targeted levels.
One caution is that some reading this blog may not have a futures account opened with an FCM who allows trading in these contracts, and therefore might miss an opportunity to buy at their targeted level. I'd encourage users to go through the account-opening process and to even consider beta-testing trading with one-lot bids (or buys). See the Resources page of my website for FCMs that I know allow trading in these products (or earn a $100 reward if you identify others that allow retail traders in these contracts).
Net, no reader knows where the bottom will be, but it might be prudent to get ready today so that they can jump on any further opportunities that this market creates.
Feel free to contact me if you have any questions about this blog, have trading ideas you'd like to explore, or if you'd just like to learn more about how home price index derivatives can be used in hedging strategies.
Thanks, John
^1 - I'm highlighting price at expiration, but prices can move even lower before expiration.
^2 -Depending on how many contracts one bought, the purchase level of those contracts, and the correlation between the home price and the index.
^3 -For example, someone looking for $420,000 of index exposure could buy one contract every N weeks until they own 6 contracts.