One of the (NAR-style) arguments for buying a house now, despite high mortgage rates, is that, if you wait three years expecting interest rates to fall, and they do, prices will be much higher. Well you can hedge against that.
As highlighted in the illustration below, quotes on the Case Shiller 10-city index Feb '27 contracts (that are traded on the CME) are below both spot levels and Feb '24 contracts.^1 That means that someone looking for a house today might consider instead, buying a 3-year forward contract (probably with <10% margin), renting (as rental rates are flat -per Jay Parsons), and putting their current down-payment in the bank to earn ~5%.^2 If home prices do rise over the next three years, the gains on the Feb '27 contract might partially offset the higher price that they will later have to pay.
Note that since the 10-city index is an average, this "buying forward at flat to a discount price" strategy, will be true for some of the 10-city components (e.g. CHI, Las Vegas (LAV), LAX, NYM and WDC) but not others (e.g. BOS, DEN, SDG). ^3 Further, OTC strategies can be arranged on other cities. ^4
In addition, recall that this strategy doesn't have to embrace the typical 100% Rent vs Buy decision. That is, a hedger could buy a portion of their targeted exposure one contract at at time. Since contracts have notional values of $250 *price, a contract trading at 300 would have notional value of $75,000. Somone looking for exposure on a $375,000 house (to make the math easy) could buy 20%-40% percent of their targeted exposure.
Further the decision to hedge doesn't have to be done at a single point in time. Someone looking to eventually buy 4 contracts could buy them all at once, or spread out over a number of days/ weeks/ months. ^5
Logistically, one could enter the trade using the Feb '24/Feb '27 calendar spread. This YOY approach reduces any seasonality effect, and pushes back on the notion that since the Case Shiller references lagging indices that comparing to even higher spot levels is misleading (as some downward pressure on home prices for late 2023 is baked in). When the G24 contract expires, the position in the G27 would remain open.
I'm bidding the HCI (10-city), LAV, LAX, NYM, SFR and WDC Feb '24/Feb '27 (or G24/G27) calendar spreads all at levels >= 0. That is, I'd buy the G24 contract above the price that I'd simultaneously sell the G27 contract.
Now some might be curious with the notion of prices flat between Feb 2024 and Feb 2027. While there may be some bears who expect prices to remain flat or fall, I remind readers that I've long argued that prices reflect levels where risk might clear, and not that of expectations. My getting short (or shorter, or selling longs) for Feb 2027 could reflect a number of themes to include the notion that I have been seeing more people looking to hedge, and so I expect more sellers than buyers at those forward levels. However, my intentions don't impact how prices will play out, so don't think that trading has to be a win/lose situation., in fact if both sides get what they want, both "win".
I'm open to other calendar permutations, but the ability to trade 3 years forward at below spot has been rare, and I thought it was worth an FYI.
Contact me here if you have any questions.
Thanks,
John
^1 - I offer the comparison of Feb '2 v Feb '27 to minimize seasonality issues.
^2 - You'll need to open an account with an FCM/futures broker. DM me if you need ideas. Follow Jay on Twitter (@jayparsons)
^3 -I've not been quoting many Feb 2027 regional contracts as my preference has been to first build interest in the 10-city index contracts, but I will populate quotes on Monday.
^4 - Note that this strategy can't be applied to every city e.g. the balance of 10-city components, or other cities with more bullish outlooks.
^5 -See Benefit of Bite-Sized Exposures for more on this topic