The impact of tariffs on home prices?

While much has been written about the impacts of tariffs (and the growing trade war with China) on consumers (who may have to pay more for an imported good) and on producers (who may see a decline in demand for the goods when retaliatory tariffs are place on their products by China), I'd like to focus here on, and prompt trading interest in, the questions of the potential impact of tariffs on home prices. As highlighted in a Brookings piece from Nov. 2018^1, trade -particularly trade with China - tends to be concentrated in a very small number of coastal cities. While Los Angeles, Long Beach, Oakland, Portland, Oregon, Seattle and Tacoma Washington are obvious ports for imports from (and exports to) China, Houston, New Orleans, Mobile are transit hubs for commodities, while New York (Port Elizabeth) and Baltimore handle large flow of consumer-focused goods. The Brookings study estimates that 20% of the trade volumes in Los Angeles, Long Beach and Oakland might be impacted.^2

The report notes that "Port Metro areas must prepare for fallout from tariff-induced trade reductions."^3 Declining trade volume might lead to "reductions in business activity -leading to decreased labor hours, rising fiscal challenges,and an overall drag on economic growth".^4 In addition "..port employment mirrors the concentration of trade volume...(and) their sizable labor forces could bear the brunt of any tariff-induced declines in trade"^5

While the report quantifies the potential impact on local employment it is silent on the potential impact on home prices. What then might the impact be on various cities? I have no idea, but I do know that people wrestling with this question, or those with exposure to these areas, might want a place where they hedge (long or underweight exposures) or where they can express a pure play on home prices. Tariff negotiations seem to be going back and forth, so to the extent expectations of end policies evolve, I'd expect the impact on home prices in those regions, to continue to change.

The chart below summaries quotes on home price derivatives on selected cities. The top half has prices from CME Case Shiller futures contracts. To the left is the Feb 2020 contract which references year-end 2019 levels. To the right (in this section) I've shown the Nov 2020 contract prices, as the Feb '21 contract won't be opened until the August 2019 contract expires. BTW -I'd be open to an OTC trade on the Case Shiller index for Feb '21 expiration with anyone who would agree to transfer the trade to the CME once the contract is opened.

The lower portion of the table has quotes for both year-end 2019 and year-end 2020 for indices on four other port cities that I would facilitate via an OTC agreement on the HPHF (Home Price Hedging Fund) platform. (Yes, I've decided to go beyond having just one expiration as hedging should be for longer time frames than nine months.)

As on many CME posts, please contact me as I'm likely to engage in more than one contract, at levels inside the often wider quoted GTC orders. On the HPHF agreements, I've posted tighter bid/ask spreads as: 1) the notional amounts are smaller (i.e. $100 * index value) and 2) I'm trying to prompt reactions to start trading that might eventually lead to periodic auctions. In either case, feedback on price levels would be appreciated.

Please fee free to contact me if you have any questions about this blog, or any aspect of hedging home price indices, or housing derivatives.

Thanks, John

^1-5 "A handful of ports and their workers bear the brunt of retaliatory tariffs" (Adie Tomer, and Joseph W Kane, Brookings, Nov 28, 2018).