My June 13th blog (Part 1) on a recent Fitch report focused on the ten cities that are referenced by CME S&P Case Shiller futures contracts. (BOS, CHI, DEN, LAV, LAX, MIA, NYM, SDG, SFR and WDC). The CME contracts allow users to take bite-sized views on whether they agree with prices for the 11 expirations for each contract (to incrementally reduce risk), and (as it relates to the Fitch report) whether they agree that some cities (most notably LAV) are overvalued. The advantages of the CME platform are that prices are public and counter-party risk is to the CME.
In response to inquiries on other regions, I recently launched an OTC platform (Home Price Hedging Fund) to facilitate home price index agreements on other cities. Using that platform, one can express a view on the other 10 cities mentioned in the Fitch report, and any of the (>300) Freddie Mac home price indices. As an OTC platform, I've capped potential prices moves (typically to+/- 10% of an initial forward price, required posting of potential payouts (still leaving 10:1 leverage), and have tried to focus agreements on year-end index values (today for 2019 and 2020).
The table below shows the components for an agreement on Cleveland (one of the cities that the Fitch report identified as under-valued). Key variables include:
* The Freddie Mac reference index (as "Cleveland" can mean different things to different index providers, e.g. the CME contracts reference Case Shiller indices),
* The current index value, the value for Dec 2018, bid and offered implied HPAs (Home Price Appreciation) for 2019 and 2020, and the resulting bids and offers for home price index agreements referencing year-end index values for 2019 and 2020
* Also shown in the history of index values (top line referencing the left vertical axis), the December index values (red dots), the YOY differences (the lower line referencing the right axis), and the bids and offers on index agreements (denominated for each axis).
* Finally, there is a tally of the notional value of a single agreement (= $100 * index value), and the HPA for the last 12 months.
The Cleveland graph reflects that bids and offers are above current levels (using Dec v Dec comparisons) but are priced at a level consistent with slowing YOY gains. (Alternatively, recall that I believe that forward contracts seem to clear at a discount to expectations -given the imbalance between sellers and buyers. As such, I wouldn't necessarily conclude that the graph supports a view that expectations are falling.)
Given this approach, here are prices for the "second ten" list of cities referenced in the Fitch report:
Note that I am showing these prices primarily to stir debate and to get some agreements printed. My intention is not to load up on either side of an index trade, but instead to develop a platform that will allow locals to hedge exposures (from either long or short side) a common auctioned price. However to get that off the ground, I appreciate that taking one side or the other of some agreements may be necessary to prompt further hedging interest.
Further recall that the Fitch reports cites Cleveland and Detroit as undervalued, Minneapolis and Tampa as 5-9% overvalued, Dallas, Phoenix and Seattle as 10-14% overvalued, and Portland as 15-19% overvalued. These contracts may a way to express your agreement (or disagreement) with Fitch's outlook.
Please feel free to contact me if you have any questions about this blog, about HPHF, or on any topic related to hedging home price index risk.