Texas: Home Price Index Agreements

The Texas real estate markets have often seemed like outliers versus the headlines from California. Home prices in Texas (generally) didn't participate in thee bubble from during the last decade, borrowers were not able to lever as much as the rest of the country, Texas indices were excluded from CME Case Shiller contract selection, home prices in certain areas probably have a positive correlation to energy prices (as opposed to colder areas such as Chicago, Main and areas with long-distance commuters), demographics have been uniformly positive, and/but cities are not geographically constrained, so construction has expanded (over time) to meet demand. Net, Texas home price growth has been slow and steady.

That said, while risks are probably lower (and therefore option premiums should be relatively lower, if any readers prefer one-sided exposure) the same reasons to hedge (from either long or short side) with bite-sized exposures exist. Longs may reduce the stress of a sell-off in home prices, or attempt to lock in regional gains by lightening up, while renters, or out-of-state prospective buyers (e.g. job-seekers, Millennials, or retirees) might want to have some exposure to home prices in Texas.

Here then are levels on five cities where I'd be willing to facilitate some home price index agreements.

Note that I'm referencing the Freddie Mac NSA home price indices. This series is updated monthly and with a shorter reporting lag than Case Shiller (hence the Jan 2020 expiration, references 2019 year-end numbers).

While my goal is to eventually foster periodic auctions of home price index agreements (see HPHF write-up) my experience suggests that some element of "stirring the pot" with me taking some role in one-off trades as counter-party, may be useful in jump-starting this effort. As such, I've posted levels that I would entertain entering into a handful of agreements. That is, my goal here is in fostering discussion of forward prices, and of aggregating inquiries, rather than taking a large exposure on either side. (Recall that a single agreement has notional value of $100 * index, so each agreement here would have notional value of about $16,000-$24,000.  Further each party to an index agreement needs to pay about 10% of notional value for their exposure. Finally, I want to steer all inquiries for any one region to a single expiration (maybe adding a second, for Jan 2021, in a few months) to consolidate interest.)

As I noted above, Texas home price growth has been slow and steady, and the forward markets reflect that trend to continue.

Please contact me if have any questions related to this blog, or any aspect of hedging home price indices. I intend to promote similar discussions on other regional areas, so please send me inquires on areas that you'd like to see agreements.

Thanks, John