The Joint Center for Housing Studies of Harvard University (@Harvard_JCHS) posted a graph last month that shows gains in rents vs. gains in home prices. San Francisco stands out as an outlier with middle of the pack gains in home prices, but VERY low gains in rent. This might not be a surprise as 1) San Francisco has been one of the most expense cities (so moving for affordability is compelling, and 2) the tech industry that dominates employment in SFR, has an easy ability to work remotely. Net, why expect that SFR home prices will continue to rise (if only at the national rate) if rents lag, and the best-paid workers don't need to live there?
If rents are a driver of future home prices (which seems to be a key feature of Zillow's forecasting model -see next blog) what might this low growth in rents mean to San Francisco home prices, if only in comparison to other large cities?
Yesterday, I posted a blog showing how one might use HPHF Ratio Agreements to express a view on the relative performance of one city vs. the Case Shiller 10-city index. Here's a version of that analysis for the Case Shiller SFR index. Note 1) that despite the volatility that one typically associates with the SFR index, that the SFR/HCI ((10-city index) ratio has been very stable over the last few years, and 2) that despite the low rent gains, the forward ratio is quoted near flat to year-end levels.
While HPHF Ratio Agreements may be the only tool for hedging home price indices across many cities, an HPHF RA may also be helpful for smaller exposures (i.e.< $500k) even on cities that have CME Case Shiller futures. That's because, the CME contracts trade with different notional values ($250* price) so one 10-city index future (i.e. HCI, Feb 2023 (G23)), has a notional value of 313.5*$250 or $78,375, while one SFR Feb '23 (G23) contract at 365.5 (using mid-market levels on both) has a notional value of $90,875, or a ratio of ~86%. As such, one would need to match 7 SFR vs 9 HCI to have closer-to -equal notional values (of ~$817,00). (CME, we need mini HCI (10-city index futures!, with notional values of $10-20,000.) BTW -I'd be happy to facilitate any such CME pairs trades inside the outright bids and offers on the two contracts.
Please feel free to contact me if you have views on this relationship, have other cities that you'd like to see quotes, or if you'd just like to learn more about how home price index derivatives might be used in hedging strategies.
Thanks,
John