Last week I blogged in support of the notion that there is a way for users to express views on how to express the view that one city will outperform another. Key elements of such a trade include the index to use, and the beginning and ending time frame.
Additional key points, that I'll highlight here, are that: a) there already may be market-based prices for the level that home price index risk will clear, and b) that those levels can vary substantially from city to city.
The diagram below illustrates where home price risk might clear (using Case Shiller indices, comparing Dec 2019 levels (so the index released in Feb 2020) with Dec 2020 year-end levels. Ten of the indices have home price index contracts that are quoted on the CME. The bids and asks shown here are bids and offers on the Feb '21 (G21) contracts compared to 2019 year-end levels.
For the other ten regions (that comprise the balance of the Case Shiller 20-city index) I've taken HPHF Relative Performance levels (e.g. ATX +2.00/+4.00% vs HCI for 2020), translated those into prices, and then compared those prices to year-end 2019.
In general, cities that have CME markets are quoted (on the bid side) at discounts (with the exception of DEN), while the "other ten" indices are quoted at levels consistent with gains for 2020 (except Dallas (DAX)). (Note that I've excluded Detroit (DEX) as there have been no recent updates to the DEX index).
These levels echo much of what home price researchers forecast on potential under-performers (e.g. that LAV has problems in a Covid world, that CHI has longer-term economic issues, and that there may be more hedgers than buyers in the California markets), and, at the opposite end, that mid-tier cities will outperform larger cities.
So, saying that (picking the extremes) that Phoenix (PHX) is likely to outperform LAV (Las Vegas) this year, is not a dangerous bet as the levels where home price index risk might clear already has PHX several percentage points ahead.
I've done similar exercises for other cities (e.g. Salt Lake, Nashville, Pittsburgh) using the Freddie Mac NSA home price indices. I've also used different time-frames (e.g. starting with spot levels, going to year-end 2021)
Feel free to contact me if you'd like to discuss this blog, have ideas on expressing a view on any cities or timeframes, or just want to discuss how using home priced index derivatives might work in a hedging strategy.
Thanks, John