HOUSING DERIVATIVES

Housing Indices - Spot Index v High Index Marks

Below are two tables that highlight the housing price moves from the highest levels attained over the last few years compared with the most recent indices.  When you embed the futures and swap forwards that are traded on these indices, the change in housing stock value from high watermark in US housing pricing to the end-2012 prediction is down 30% to 50% in many markets.

S&P/Case-Shiller Index - January 2008 v Highs
	High	High	Jan 2008	High v	Nov 2012	High v
	Month	Index	Index	Jan 2008	Futures*	Nov 2012
Atl	Jul 07	136.47	127.08	-6.88%
Bos	Sep 05	182.48	162.59	-10.90%	-11.80%	-22.70%
Char	Aug 07	135.88	131.70	-3.08%
Chi	Sep 06	168.60	156.47	-7.19%	-7.10%	-14.29%
Clev	Jul 06	123.49	108.49	-12.15%
Dal	Jun 07	126.47	118.56	-6.25%
Den	Aug 06	140.27	128.98	-8.05%	-13.90%	-21.95%
Det	Dec 05	127.05	100.17	-21.16%
LA	Sep 06	273.94	224.41	-18.08%	-27.70%	-47.78%
LV	Aug 06	234.78	186.05	-20.76%	-16.80%	-37.56%
Mia	Dec 06	280.87	225.40	-19.75%	-30.80%	-50.55%
Min	Sep 06	171.12	151.16	-11.66%
NY	Jun 06	215.83	200.49	-7.11%	-19.00%	-26.11%
Pho	Jun 06	227.42	180.06	-20.82%
Port	Jul 07	186.51	178.81	-4.13%
SD	Nov 05	250.34	197.45	-21.13%	-21.80%	-42.93%
Sea	Jul 07	192.30	181.62	-5.55%
SF	May 06	218.37	183.81	-15.83%	-15.70%	-31.53%
Tamp	Jul 06	238.09	194.64	-18.25%
WDC	May 06	251.07	212.83	-15.23%	-22.00%	-35.23%
10-C	Jun 06	226.29	196.06	-13.36%	-21.50%	-34.86%
20-C	Jul 06	206.52	180.65	-12.53%
* based on CME Settlements March 18, 2008
Source: S&P, Bloomberg, TFS
Radar Logic RPX - March 25, 2008 Publication Date v 28-day Highs
	High	High	25-Mar-08	High v	5 Year	High v
	Month*	Index	Index	Index	Swap Market	Dec 2012
Atl	Aug 07	106.31	90.60	-14.78%
Bos	Oct 05	257.46	206.75	-19.70%
Char	Aug 07	101.62	93.78	-7.72%
Chi	Aug 07	205.19	169.20	-17.54%
Clev	Aug 05	99.59	84.10	-15.55%
Col	Sep 05	103.92	91.58	-11.87%
Den	Sep 07	152.56	128.31	-15.90%
Det	Oct 05	121.60	96.94	-20.28%
Jax	Jan 07	135.97	115.31	-15.19%
LA	Jun 07	401.65	328.80	-18.14%
LV	Jul 06	186.72	137.90	-26.15%
Manh	Dec 07	1184.95	1117.59	-5.68%
Mia	Jul 06	208.48	175.51	-15.81%
Milw	Aug 07	135.29	110.48	-18.34%
Minn	Aug 06	164.36	141.12	-14.14%
NY	Aug 07	310.00	288.47	-6.95%
Phi	Aug 07	164.59	148.58	-9.73%
Phx	Aug 06	167.81	136.01	-18.95%
Sacr	Nov 05	252.78	165.90	-34.37%
SD	Jul 06	357.34	269.23	-24.66%
Sea	Aug 07	236.16	212.87	-9.86%
SF	Aug 07	463.32	374.70	-19.13%
SJ	Jul 07	484.69	417.77	-13.81%
Stl	Jul 07	124.52	103.99	-16.49%
Tamp	Aug 06	147.18	117.83	-19.94%
WDC	Jul 06	267.18	219.43	-17.87%
25 C	Aug 07	278.32	242.76	-12.78%	-22.50%	-28.78%
				(1Q08 not double counted)
*Publication date
Source: Radar Logic, TFS

S&P/Case-Shiller January 2008 Index Release

Today, the January 2008 S&P/Case-Shiller index was released:

S&P/Case-Shiller Index - January 2008
CME	Jan 07	Dec 07	Jan 08	Dec 07 v       Jan 08	Dec 07 v    Jan 08	Jan 07 v      Jan 08
Bos	168.29	164.59	162.59	(2.00)	-1.22%	-3.4%
Chi	167.52	160.03	156.47	(3.56)	-2.22%	-6.6%
Den	135.86	130.98	128.98	(2.00)	-1.53%	-5.1%
LV	230.52	196.05	186.05	(10.00)	-5.10%	-19.3%
LA	268.68	233.03	224.41	(8.62)	-3.70%	-16.5%
Mia	279.42	231.71	225.40	(6.31)	-2.72%	-19.3%
NY	212.78	201.80	200.49	(1.31)	-0.65%	-5.8%
SD	237.16	202.45	197.45	(5.00)	-2.47%	-16.7%
SF	211.78	189.23	183.81	(5.42)	-2.86%	-13.2%
WDC	238.85	218.38	212.83	(5.55)	-2.54%	-10.9%
10-C	221.32	200.55	196.06	(4.49)	-2.24%	-11.4%
	Jan 07	Dec 07	Jan 08	Dec 07 v Jan 08	Dec 07 v Jan 08	Jan 07 v Jan 08
Atl	133.45	129.43	127.08	(2.35)	-1.82%	-4.8%
Char	129.43	131.90	131.70	(0.20)	-0.15%	1.8%
Clev	118.61	112.07	108.49	(3.58)	-3.19%	-8.5%
Dal	122.64	120.77	118.56	(2.21)	-1.83%	-3.3%
Det	117.96	103.30	100.17	(3.13)	-3.03%	-15.1%
Min	167.97	155.37	151.16	(4.21)	-2.71%	-10.0%
Pho	220.20	187.67	180.06	(7.61)	-4.05%	-18.2%
Port	179.79	182.47	178.81	(3.66)	-2.01%	-0.5%
Sea	183.92	184.88	181.62	(3.26)	-1.76%	-1.3%
Tamp	228.86	200.13	194.64	(5.49)	-2.74%	-15.0%
20-C	202.31	184.86	180.65	(4.21)	-2.28%	-10.7%

Source: S&P, Bloomberg

Housing Forward Curve - Spot and Forward Price Convergence

Housing derivatives present a forward curve that shows where contract prices are for housing prices in the future.  They are tradable contracts.  They synthesize all the information about the housing market and describe where the housing price indices are moving toward.  These forward prices can change at any time the way a commodity contract price can change at any time.

When a housing investor looks at say a 20% drop in value in two years as per a housing derivatives market, he may ask "why trade at less than 20% drop now when the contracts show that the market is going to drop further?"

Jonathan Miller of The Matrix presents this forward market conundrum in terms of foreclosure auction results:

"... the observable price reflected in public record transactions includes sales where the seller was not willing to wait for the length of a typical days on market period.

"Nevertheless, in a market with expanding inventory and therefore longer marketing times, the spread between the actual market price and the liquidity price will expand. In an extreme case, such as a foreclosure auction sale, the discount achieved in the auction reflects the declining market conditions over a particular holding period.

"In a market that is dropping 10% per year, a 20% discount at auction today would be the equivalent of waiting for a year to sell the property as the market drops. The decline is compressed into a one day auction rather than 12 months of exposure. The auction discount should be higher than the market decline because there is reduced holding costs and risk in selling quickly if the seller is certain the market is continuing to erode. However getting rid of the seller’s sense of denial of a decline in weak housing market may be impossible to overcome."

In a way, forward becomes spot becomes forward in a continuous loop.  If the market "sees" a certain price expectation in the housing derivatives market, the spot cash market will move to it, thus creating a new forward price.

Property Derivatives Seminar At Bloomberg NY

Bloomberg is hosting a seminar in New York covering, among other topics, property derivatives pricing and portfolio management.

March 26, 2008, 1:00PM - 7:00PM

Bloomberg

731 Lexington Avenue

New York, NY 10021

RSVP 212 617 1521

Zillow Index and S&P/Case-Shiller

Zillow produces the Zindex (Zillow Home Value Index).  It is a median value method.  On the Zillow blog, Zillow compares their Zindex to S&P/Case-Shiller and OFHEO.

Housing Derivatives As The Leading Indicator

At the risk of sounding glib, it appears that the value changes in the US housing market is the ultimate culprit in the financial meltdown that the markets are experiencing. 

Housing derivatives, though relatively new, have been indicating declining values since the CME launch of May 2006.  Since then, the forward values for housing have consistently been lower, never once showing an uptick.  Further, the September 2007 introduction of the Radar Logic RPX market has only displayed negative forward values. 

While housing derivatives trading volumes are light in relation to other markets, the indication/prediction of future housing prices has been spot on.  It led the information pool.

Are housing derivatives the best leading indicator for credit and therefore equity markets?  Will they be the leading indicator for the future? 

ReXX Commercial Property Index Launch On ISE

The International Securities Exchange (ISE) today announced the upcoming launch of ISE Alternative Markets with the introduction of derivatives auctions based on the ReXX Commercial Property Indices.

"The ReXX Commercial Property Indices are the first rent-based commercial real estate indices for commercial property derivatives and represent nearly two billion square feet of real estate valued at two trillion dollars. Unlike traditional real estate indices that serve as lagging indicators and are purely appraisal or transaction-based, ReXX is a leading indicator based on current market asking rents, lease transactions, inflation and interest rates."

HUD to Use Radar Logic RPX

In a news release today, Radar Logic Incorporated, the real estate data and analytics company that enables derivatives trading in the RPX™ market, provided data and analytic support to HUD in calculating median home prices in counties across the U.S.

ABX Marks US Subprime Mortgage Inventory At Approx. 65 Cents On The Dollar

The subprime mortgage inventory value is down another 5 % since November 2007.

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 ABX swaps offer protection if the securities are not repaid as expected, in return for regular insurance-like premiums. A decline in the ABX Index signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments. Likewise, an increase in the ABX Index signifies investor sentiment looking for subprime mortgage holdings to perform better as investments.

The ABX Index has four series (06-1 to 07-2) and five tranches per series. To get a value for the subprime mortgage inventory, one could weight the 20 available ABX values. Hypothetical weights:

06-1 - 35%, 

06-2 - 30%, 

07-1 - 20%, 

07-2 - 15%

AAA - 80%, 

AA - 5%, 

A - 6.5%, 

BBB - 2.4%, 

BBB- - 1.1%, 

Equity - 5% (marked to zero)

Using the Friday February 2008 settlements (as posted by Markit) for all the available ABX values and the above weights, the subprime mortgage inventory is valued at 64.75 cents on the dollar, down from 69.5 cents as calculated on November 23, 2007.  This is a rough estimate and quite imperfect - it assumes weights among the four series themselves and only looks at the subprime mortgages issued since 2H 2005.  This number can, however, provide a order of magnitude figure for the value of the subprime inventory.

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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