I encourage all readers to review today’s WSJ article titled “Bidding Wars Back for Homes“. While the title draws from the anecdotes of buyers paying ever-higher premiums over listed prices, the meat of the article is a table from Realtor.com showing how little time houses stay on the market in “hot markets”. The middle column emphasizes that hot markets are getting even hotter.
So what might the prospective buyers have done differently (he asked in a rhetorical, self-serving way) OR, since this is a column on use of futures, what might someone looking at this as a temporary phenomenon do?
The graph below shows the daily closes for the DENX15 contract. The contract closed at 167.0 on 12/31/2014 and today is quoted 176.0/180.0. That’s a gain of 5.4% or $250/point = $2250/contract had someone been able to buy the DENX15 contract at 167. Since one contract has a notional value of $250* index price, at 167, each contract was worth ~$41,750. Those readers looking to buy a $417,500 could have (in theory) bought ten contracts giving them $22,500 that could have gone to pay for a higher purchase price.
If effect, future first-time buyers of homes (so ignoring those who were trading from one to another) were un-hedged. As with any un-hedged future user of a product (in this case real estate) they could have hedged their exposure by buying forward index contracts.
Most hedging examples focus on situations where someone is long an exposure that they want to reduce. However, the above example shows how someone who has less exposure than they want (whether a single home-buyer or an institutional investor) could (in theory) remedy their situation buy buying futures.
A more classic hedging example might be for those who are long real estate, or for a builder who wants to build homes for sale 2-3 years from now, but who wants to reduce the risk of where prices might be in 2017-2018.
Prices for DEN contracts are consistent with higher Case Shiller index levels over the next few years. The DENX17 contract has a 192.0 bid which is ~15% higher than today’s spot index level. So, someone looking to hedge DEN exposure, or wanting to bet against such implied gains, could short DENX17 contracts.
While I’ve focused on DEN, the same analysis can be done for each of the ten Case Shiller 10-city indices in futures trades, or on other indices in OTC trades.
Now the qualifier that I’ve used throughout this blog (“in theory”) is an important one as there has been near zero volume for many contracts over the last few months. That said, I think that the CME &P Case Shiller futures contract is the best public platform for viewing, or expressing views, on forward home prices.
Feel free to contact me (firstname.lastname@example.org) if you have any questions, or if you have a trade idea that you’d like to propose, or have me share with other readers.