Three Papers On Property Derivatives
S&P published three papers that discuss US housing and commercial real estate derivatives. The housing paper discusses how to investigate taking a long derivatives position in a falling housing market.
S&P published three papers that discuss US housing and commercial real estate derivatives. The housing paper discusses how to investigate taking a long derivatives position in a falling housing market.
| S&P/Case-Shiller Index - April 2008 | |||||||
| CME | Apr 07 | Mar 08 | Apr 08 | Mar 08 v Apr 08 | Mar 08 v Apr 08 | Apr 07 v Apr 08 | |
| Bos | 169.61 | 158.54 | 158.68 | 0.14 | 0.09% | -6.4% | Bos |
| Chi | 165.87 | 150.33 | 150.44 | 0.11 | 0.07% | -9.3% | Chi |
| Den | 134.86 | 127.43 | 128.49 | 1.06 | 0.83% | -4.7% | Den |
| LV | 226.65 | 169.31 | 165.89 | (3.42) | -2.02% | -26.8% | LV |
| LA | 263.36 | 207.11 | 202.52 | (4.59) | -2.22% | -23.1% | LA |
| Mia | 273.53 | 207.11 | 200.42 | (6.69) | -3.23% | -26.7% | Mia |
| NY | 211.61 | 196.56 | 193.93 | (2.63) | -1.34% | -8.4% | NY |
| SD | 232.64 | 185.44 | 180.57 | (4.87) | -2.63% | -22.4% | SD |
| SF | 211.47 | 168.38 | 164.63 | (3.75) | -2.23% | -22.1% | SF |
| WDC | 236.17 | 203.34 | 201.21 | (2.13) | -1.05% | -14.8% | WDC |
| 10-C | 218.94 | 186.13 | 183.15 | (2.98) | -1.60% | -16.3% | 10-C |
| Apr 07 | Mar 08 | Mar 08 | Mar 08 v Apr 08 | Mar 08 v Apr 08 | Apr 07 v Apr 08 | ||
| Atl | 134.27 | 124.31 | 124.19 | (0.12) | -0.10% | -7.5% | Atl |
| Char | 131.98 | 131.54 | 131.82 | 0.28 | 0.21% | -0.1% | Char |
| Clev | 117.57 | 106.42 | 109.55 | 3.13 | 2.94% | -6.8% | Clev |
| Dal | 124.68 | 119.07 | 120.41 | 1.34 | 1.13% | -3.4% | Dal |
| Det | 114.38 | 95.57 | 93.79 | (1.78) | -1.86% | -18.0% | Det |
| Min | 164.78 | 142.27 | 139.19 | (3.08) | -2.16% | -15.5% | Min |
| Pho | 215.04 | 166.97 | 161.33 | (5.64) | -3.38% | -25.0% | Pho |
| Port | 183.55 | 174.39 | 174.87 | 0.48 | 0.28% | -4.7% | Port |
| Sea | 188.89 | 178.29 | 179.57 | 1.28 | 0.72% | -4.9% | Sea |
| Tamp | 224.13 | 182.26 | 178.50 | (3.76) | -2.06% | -20.4% | Tamp |
| 20-C | 200.53 | 172.20 | 169.85 | (2.35) | -1.36% | -15.3% | 20-C |
Source: Bloomberg
The IRS has made a ruling that addresses the tax implications of trading US property derivatives. The tax ruling makes the difference between real property and index property. As reported by RED-SIG:
"The IRS officially ruled that derivative index trading in the US is not subject to FIRPTA (Foreign Investment in Real Property Tax Act). This is very significant as the reading of the FIRPTA rules was not clear regarding derivatives and has led to uncertainty for overseas investing in US property derivatives.
"... the IRS states that a trade via a real estate index swap on a broad based index by a non U.S. resident should not constitute an interest in U.S. real property for purposes of FIRPTA."
Here is the ruling language Download irs_ruling.doc.
This SeekingAlpha article compares the pending Chrysler Building sale (New York, NY) price with the performance of the Rexx Index. The RoR performance of the physical asset (alpha) and the Rexx Index (beta) seem to converge.
MacroMarkets has filed with the SEC to list exchange-traded housing price securities. These securities will allow retail and institutional investors to access changes in the S&P/Case-Shiller Home Price Index with 2x leverage. Here is the SEC filing.
Blogosphere comments on this product:
Altos Research, Altos again, Portfolio, Random Roger's Big Picture, Index Universe, SeekingAlpha, Resource Investor
The RPX derivatives market has surpassed $1 billion in trades since its launch in September 2007. This is a significant milestone in US housing derivatives.
Housing Derivatives reader EJH has stripped apart these indices to understand their pricing (and perceived "mispricing"). Below is his analysis of Case-Shiller v OFHEO:
"I aim to address the S&P/C-S US vs. OFHEO Purchase-Only issue recently discussed. These two national indices have substantial similarities, and one outcome here is that the latest (2008 Q1) S&P/C-S US and OFHEO P-O differ little in their inferred U.S. national housing overpricings of 32% and 28%, respectively.
The right way to examine the US$ price history of an "investment" over time is after correcting for the diminished consumer purchasing power of the US$ over time (CPI-U used). Such histories can be compellingly informative, but (therefore?) are little seen.
Look at the real inflation-corrected housing indices in the last chart here. And, see also the adjacent text for inferred "WILL return to" levels. OFHEO P-O substituted into this chart is shown here. Its inferred "WILL return to" level is ca. 67, much different from the ca. 54 of S&P/C-S US (100/67 = 1.5; 100/54 = 1.85).
The three S&P/C-S real indices look perhaps shape-similar, except for vertical departure from inferred "WILL return to" level. Rescaling the red and blue departures accordingly to match the green obtains this here -- very much shape-similarity! Adding the accordingly rescaled OFHEO P-O obtains this here -- much shape-similarity!
A real index’s difference from its inferred "WILL return to" level is here called "mispricing" (or sometimes "overpricing"). Mispricing, as percent of total price, for the three S&P/C-S real indices is the first chart here. And OFHEO P-O added thereto is here. The two national indices, S&P/C-S US and OFHEO P-O, differ much in maximum overpricing: 46% and 33%. But the latest (2008 Q1) S&P/C-S US and OFHEO P-O differ little in their inferred U.S. national housing overpricings of 32% and 28%, respectively. Subsequent rates of drop for the two remain to be seen."
Seeking Alpha published an article that looks at the use of real estate derivatives and commercial rent risk. Like commodities, both landlord and tenant face considerable price risks.
An article in the Q1 2008 Journal of Real Estate Portfolio Management paints a compelling picture for the future of real estate derivatives.
Trading data from the UK is suggesting that UK house prices will fall 20% by 2011. Naked Capitalism has a follow story.
The Radar Logic RPX index supports the majority of US housing derivatives trading. The RPX March 2008 Monthly Housing Report highlights housing price action seen to date. RPX spends a lot of analysis on the impact and breadth of motivated housing sales (i.e., foreclosures, REO sales).
Realtor Magazine, an organ of the National Association of Realtors (NAR), posted an article that accuses the Case-Shiller index of a bias crime.
Realtor's charge is that SPCS has a downward price reporting bias. They also cite an "unctuous" (editor's memnomic) link to the financial trading community. The article then uses an OFHEO paper that examines the futures contracts values with the actual index values. This argument that does not address the bias charge at all (actually has nothing to do with the index itself) and is used as a central argument premise.
Because the Case-Shiller index diverges from OFHEO's findings, the NAR claims mal-intent and bias. Yet, as per the article, OFHEO seems to have no horse in this race:
"... In any case, OFHEO researchers admit that they don’t really know the source of divergence between their index and Case-Shiller’s...."
If you are serious about this discussion on housing indices, see Matt Carter's post in Inman News. Carter rebuts the NAR claims to this high, dry index ground. Point by point, the Realtor argument of bias is taken apart. It is comprehensive in evidence.
If the Case-Shiller Index were to show upward price movement accelerating faster than NAR or OFHEO indexes, would the Case-Shiller index be lauded and cited as the NAR's index of choice?
The table below highlights the housing price changes, as reflected by the S&P/Case-Shiller Index, from the highest levels attained over the last few years compared with the most recent indices. Then, when you embed the futures prices that are publicly traded on this index (CME housing futures), the change in housing stock value from high watermark in US housing pricing to the end-2010 prediction is down over 30% in many markets.
| S&P/Case-Shiller Index - March 2008 v Highs | ||||||
| Nov 2010 Future v High Index | ||||||
| High v Mar 08 | High v Mar 08 | |||||
| High Month | High Index | Mar 08 | ||||
| Atl | Jul 07 | 136.47 | 127.61 | (8.86) | -6.49% | |
| Bos | Sep 05 | 182.48 | 158.54 | (23.94) | -13.12% | -18.57% |
| Char | Aug 07 | 135.88 | 131.52 | (4.36) | -3.21% | |
| Chi | Sep 06 | 168.60 | 150.35 | (18.25) | -10.82% | -19.93% |
| Clev | Jul 06 | 123.49 | 106.42 | (17.07) | -13.82% | |
| Dal | Jun 07 | 126.47 | 119.08 | (7.39) | -5.84% | |
| Den | Aug 06 | 140.27 | 127.43 | (12.84) | -9.15% | -19.44% |
| Det | Dec 05 | 127.05 | 95.57 | (31.48) | -24.78% | |
| LA | Sep 06 | 273.94 | 207.11 | (66.83) | -24.40% | -43.78% |
| LV | Aug 06 | 234.78 | 169.31 | (65.47) | -27.89% | -46.33% |
| Mia | Dec 06 | 280.87 | 208.88 | (71.99) | -25.63% | -39.19% |
| Min | Sep 06 | 171.12 | 142.24 | (28.88) | -16.88% | |
| NY | Jun 06 | 215.83 | 196.58 | (19.25) | -8.92% | -24.01% |
| Pho | Jun 06 | 227.42 | 166.97 | (60.45) | -26.58% | |
| Port | Jul 07 | 186.51 | 174.39 | (12.12) | -6.50% | |
| SD | Nov 05 | 250.34 | 185.44 | (64.90) | -25.92% | -39.92% |
| Sea | Jul 07 | 192.30 | 178.29 | (14.01) | -7.29% | |
| SF | May 06 | 218.37 | 168.38 | (49.99) | -22.89% | -40.56% |
| Tamp | Jul 06 | 238.09 | 182.26 | (55.83) | -23.45% | |
| WDC | May 06 | 251.07 | 202.34 | (48.73) | -19.41% | -32.45% |
| 10-C | Jun 06 | 226.29 | 186.06 | (40.23) | -17.78% | -32.83% |
| 20-C | Jul 06 | 206.52 | 172.16 | (34.36) | -16.64% | |
Source: S&P, CME, Bloomberg
All opinions expressed herein are those of the author, and no statement should be as an offer to buy or sell any futures contract, or security or option or other derivative instrument. Trading of all such futures, securities, options and other derivative instruments entails significant risk which can result in substantial financial loss. Such risks should be fully understood prior to trading. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions.
| S&P/Case-Shiller Index - March 2008 | |||||||
| CME | Mar 07 | Feb 08 | Mar 08 | Feb 08 v Mar 08 | Feb 08 v Mar 08 | Mar 07 v Mar 08 | |
| Bos | 168.52 | 160.31 | 158.54 | (1.77) | -1.10% | -5.9% | Bos |
| Chi | 167.04 | 153.33 | 150.35 | (2.98) | -1.94% | -10.0% | Chi |
| Den | 134.20 | 127.50 | 127.43 | (0.07) | -0.05% | -5.0% | Den |
| LV | 228.55 | 177.18 | 169.31 | (7.87) | -4.44% | -25.9% | LV |
