The sell-off in SFR contracts described in my Oct 11 blog continued last week, but seems to have paused with the rally in stocks over the last two days. However, even with prices stabilizing, quotes on SFR contracts have fallen to levels that may be of interest to those looking to buy a house in San Fran at some point in the future. That’s because the offered side of longer-dated SFR contracts is only a small amount above current spot levels. After years of 10+% home price gains, someone looking to buy a house today, but who doesn’t yet have enough for the down-payment, can lock in prices on the San Fran index 2-3 years from now, at levels that are consistent with home price gains of <2% per year.
For example (using the table below), Nov 2020 SFR home price index contracts were offered at 280, a level only 3.7% above the current spot index of 270.1, for an annualized gain of ~1.83%. Someone able to save at a greater yield, or who might be able to add to their savings toward a down payment, can hedge against further runaways in San Fran prices.
To recall, the ability to lock in future index levels comes from the fact that the CME Case Shiller futures contracts prices “cash settle” on the index value at settlement. As shown below, the SFRX18 (Nov 2018) contract, that expires next month, and SFR index have converged to narrow differences. The X20 (Nov 2020) contract will similarly converge to the spot index -at some unknown price in the future.
- Futures hedge against changes in index values, so aggregate movement in home prices, not prices of individual houses.
- An individual contract has notional value of $250* price, or using a price of 280, $70,000.
- There has not been much volume in SFR contracts, but 5-10 lot orders (so $350-$700k notional amount) can be traded. (Best to use limit orders, or contact me if interested).
- Futures prices can rise/fall for a variety of reasons before expiration as traders have multiple reasons for buying/selling.
Please feel free to contact me (firstname.lastname@example.org) if you’d care to discuss this blog or any other aspect of hedging home price indices.