HOUSING DERIVATIVES

S&P/Case-Shiller November 2007 Index Release

Today, the November 2007 S&P/Case-Shiller Indices were released:

S&P/Case-Shiller Index - November 2007
CME	Nov 06	Oct 07	Nov 07	Oct 07 v Nov 07	Oct 07 v Nov 07	Nov 06 v Nov 07
Bos	172.59	169.34	167.40	(1.94)	-1.15%	-3.0%	Bos
Chi	168.18	163.12	161.61	(1.51)	-0.93%	-3.9%	Chi
Den	137.65	136.08	133.36	(2.72)	-2.00%	-3.1%	Den
LV	232.56	208.68	201.95	(6.73)	-3.23%	-13.2%	LV
LA	273.05	249.50	240.43	(9.07)	-3.64%	-11.9%	LA
Mia	280.30	244.35	237.99	(6.36)	-2.60%	-15.1%	Mia
NY	214.24	205.54	203.88	(1.66)	-0.81%	-4.8%	NY
SD	242.11	217.02	209.60	(7.42)	-3.42%	-13.4%	SD
SF	213.84	202.03	195.49	(6.54)	-3.24%	-8.6%	SF
WDC	242.28	226.71	223.45	(3.26)	-1.44%	-7.8%	WDC
10-C	223.94	209.68	205.09	(4.59)	-2.19%	-8.4%	10-C
	Nov 06	Oct 07	Nov 07	Oct 07 v Nov 07	Oct 07 v Nov 07	Nov 06 v Nov 07
Atl	134.18	133.86	131.46	(2.40)	-1.79%	-2.0%	Atl
Char	128.94	133.98	132.68	(1.30)	-0.97%	2.9%	Char
Clev	120.30	115.93	113.29	(2.64)	-2.28%	-5.8%	Clev
Dal	123.87	124.36	122.38	(1.98)	-1.59%	-1.2%	Dal
Det	120.94	108.15	105.24	(2.91)	-2.69%	-13.0%	Det
Min	169.84	161.24	158.57	(2.67)	-1.66%	-6.6%	Min
Pho	223.13	200.72	194.45	(6.27)	-3.12%	-12.9%	Pho
Port	181.34	185.10	183.65	(1.45)	-0.78%	1.3%	Port
Sea	183.88	189.86	187.14	(2.72)	-1.43%	1.8%	Sea
Tamp	232.86	206.38	203.45	(2.93)	-1.42%	-12.6%	Tamp
20-C	204.65	192.94	188.82	(4.12)	-2.14%	-7.7%	20-C

CMBX Spreads Marking All-Time Highs

The sister mortgage derivative to the ABX index is the CMBX index.

CMBX derivatives, as reported by Markit, are a group of indexes made up of 25 tranches of commercial mortgage-backed securities (CMBS), each with different credit ratings. The CMBX indexes are the first attempt at letting participants trade risks that closely resemble the current credit health of the commercial mortgage market by investing in credit default swaps, which put specific interest rate spreads on each risk class. The pricing is based on the spreads themselves rather than on a pricing mechanism.

Today, the CMBX spreads settled at all-time highs.

ABX Subprime Index Making New Lows

The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages. ABX contracts are commonly used by investors to speculate on or to hedge against the risk that the underling mortgage securities are not repaid as expected.

The lowest tranches of the ABX Index, the BBB-, settled on lifetime lows today according to Markit.  The 2007 series also posted new lows across most of the tranches.  The ABX AAA 07-2, the highest tranche of the most recent vintage, settled at 66.5%, right near it's lifetime low.  The ABX AAA 07-1 made a new low at 68.66%.

Housing Prices A La Gartman

Dennis Gartman, commodity trading supremo and author of The Gartman Letter, weighs in on the US housing market:

"Housing prices are falling all across the nation, and in some areas, are plunging. All of the data confirms that trend, and until something very material changes in the psychology of potential buyers, the trend shall continue .... perhaps quite a good while longer. We found the comments by Mr. Joseph Brusuelas of IDEAglobal to be quite prescient. We do not know Mr. Brusuelas, but we found his comments worthy of note here this morning:

It appears quite clear... that the consumer has reached a psychological point where expectations of future price declines have become entrenched. We consider this to be imminently rational behaviour on the part of potential homeowners and until the new homes market observes a decline in the median price of homes and falling rates, there will be little incentive to step up purchasing activity.

"When prices fall, rational investors stand down and await a bottom... or until more adventuresome investors chose to take speculative positions by trying to catch the large falling knife that is the real estate market at the moment. With the winter upon us, the propensity for buyers to step up to buy shall be limited at best, and diminishing materially at worst. Further, with the great weight of mortgage re-sets still a few months ahead, that too shall weigh upon prices. Rational expectations are properly directed to the downside in housing for the foreseeable future. This cannot bode well for home builders; for mortgage lenders; for raw materials prices et al. confusion still reigns."

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.

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