I follow Steve Brown's Real Estate Updates at the Dallas Morning News (@SteveBrownDMN) to get a sense of sentiment in the Dallas area. He recently posted a piece in which Dr. James Gaines, the chief economist at the Real Estate Center at Texas A&M, suggested that real estate might lead North Texas in a post-Covid economic rebound.
For any who believe that Dallas will rebound quicker, or stronger, than the rest of the country (not argued in the article) they might consider an HPHF OTC Relative Performance Agreement on the Dallas Case Shiller index.
Recall that there is no CME contract on the Dallas metro area, and that in response from users looking to hedge absolute price moves, I created the Home Price Hedging Fund (HPHF) platform. However, rather than express a view on the level of a Dallas home price index at a point in time, the Relative Performance ("RP") Agreements allow users to express a view on the performance of one index vs. the Case Shiller HCI 10-city index.^1 That is, they don't need to have a view on when Dallas home prices will turn, or what level they might fall, or rebound to, but instead, can express a view on the performance of the Dallas area relative to the a more national index, for a particular notional value. That way, it doesn't matter whether home prices fall 10%,stay flat, or rise 15% over three years - just how Dallas moves relative to the Case Shiller 10-city index. ^2
I started posting spreads on 20 regions, about two weeks ago, for relative values as of year-end 2022^3 and the Dallas quote is -3.0% (bid side) vs. +1% (offered side). As with my other activity here, I offer these live quotes ^4 to prompt and possibly bracket debates about how well Dallas will perform, on a relative basis. That is, a bear on Dallas (e.g. negatively impacted by oil price declines) might think that Dallas will under-perform the 10-city index by more than 3% (over ~three years) and might focus on my bid side. On the other hand, a bull on Dallas (e.g. someone arguing the strong demographics and quicker rebound from opening the economy sooner) might want to discuss my offered side.^5
As I noted in my April 27th blog, I don't have a view on where Dallas "should" be priced, and know less about the market than locals. What I do know is: 1) that users might benefit from hedging (long or short) and 2) that there are no other program that allow users a straight-forward way to take a view on absolute or relative price moves. Given that, I've just created a platform where those that might want to add/reduce Dallas exposure can meet to swap risk with those going the other way.
Note that I've referenced Dallas in this write-up. I'd be open to writing agreements on any of the 20 cities that I've in the table I cited. In addition, I'd take color from readers looking to hedge any of the other top cities in the country, by structuring a trade using Freddie Mac Home Price indices.
The YOY changes in the Dallas (the Case Shiller DAX index) index have somewhat tracked the CS 10-city index the last few years. (see graph below) but no one "knows" how Dallas will perform (on an absolute or relative basis) going forward. A Relative Performance Agreement allows users (on either side) to hedge the uncertainty of the DAX vs. HCI, and/or to participate should the performance of the DAX index vary over the next three years.
Feel free to contact me if you have any questions about this blog, have any ideas on Dallas (or any other city), or have any questions about using home price index derivatives in hedging strategies.
Thanks, John
^1 -Absolute Price hedges can still be done, but my preferred route is to combine the type of RP agreement outlined here with an outright trade in the CME 10-city futures contract. See my April 20th blog "Hedging Minneapolis" for details.
^2 - Please check https://www.homepricefutures.com/hphf for marketing material that describes the agreements in more detail.
^3 -I can post levels for other expirations but I'm trying to focus users on year-end 2020 and 2022 scenarios.
^4 -Note that live quotes are good for $50,000 notional. Hopefully, more inquiries (on both sides) will allow me to increase the amount and/or tighten the bid/ask spreads.
^5 - I would also be open to "building a book" with users who might want to share ideas inside the posted bid/ask spread.