HOUSING DERIVATIVES

Case-Shiller Wrongly Accused Of Bias Crime

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?

Housing Prices To Be Over 30% Off From High Watermarkes

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 Release - March 2008

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
LA	264.58	214.83	207.11	(7.72)	-3.59%	-21.7%	LA
Mia	276.89	218.74	208.88	(9.86)	-4.51%	-24.6%	Mia
NY	212.39	198.46	196.58	(1.88)	-0.95%	-7.4%	NY
SD	233.28	190.34	185.44	(4.90)	-2.57%	-20.5%	SD
SF	211.09	174.54	168.38	(6.16)	-3.53%	-20.2%	SF
WDC	237.14	207.05	202.34	(4.71)	-2.27%	-14.7%	WDC
10-C	219.67	190.58	186.06	(4.52)	-2.37%	-15.3%	10-C
	Mar 07	Feb 08	Mar 08	Feb 08 v Mar 08	Feb 08 v Mar 08	Mar 07 v Mar 08
Atl	133.22	125.83	127.61	1.78	1.41%	-4.2%	Atl
Char	130.44	131.22	131.52	0.30	0.23%	0.8%	Char
Clev	117.60	106.82	106.42	(0.40)	-0.37%	-9.5%	Clev
Dal	123.10	117.72	119.08	1.36	1.16%	-3.3%	Dal
Det	116.44	97.61	95.57	(2.04)	-2.09%	-17.9%	Det
Min	165.56	145.93	142.24	(3.69)	-2.53%	-14.1%	Min
Pho	216.86	172.72	166.97	(5.75)	-3.33%	-23.0%	Pho
Port	181.72	176.24	174.39	(1.85)	-1.05%	-4.0%	Port
Sea	186.44	179.85	178.29	(1.56)	-0.87%	-4.4%	Sea
Tamp	226.58	188.59	182.26	(6.33)	-3.36%	-19.6%	Tamp
20-C	201.01	175.94	172.16	(3.78)	-2.15%	-14.4%	20-C

Source: Bloomberg, S&P

Prognosticating In The Age Of The Housing Window

There are economists and others making newer, updated forecasts for US housing all the time.  Each time a metric is released, like existing home sales, a fresh crop of prognostications about where US housing is headed is harvested.

The transparent availability of housing derivatives markets (trading housing prices 1, 2, 3, 5 years forward) is a continuous, dynamic window into where the financial markets express their views on housing prices.  The market place through trading express a view on the direction and destination for US housing prices at the MSA level.  Everyday, everyone can access and see where the derivatives markets place housing expectations. 

Commercial Real Estate Derivatives - A Paper

An MIT master's thesis has been published that reviews the mechanics of commercial real estate derivatives and their benefits.

Analytics of House Prices Falling Faster

A reader kindly presented an analysis of home prices in real inflation-adjusted terms that hypothesizes the level of the "will return to" levels for US housing prices.  While the search for that level is well underway, what this analysis does highlight is that the rate of the rise in US house prices over the last 10 years will be less than the rate of decline in US house prices.  The ten years of rises may be negated in four years.  US housing derivatives markets have been confirming this view.

CME Housing Futures Still Point To Weaker Housing

Courtesy of TFS Derivatives, the table below compares the last month's S&P/Case-Shiller Home Price Index (SPCS) release to the settlements of the CME housing futures contracts this week.  The declines are formidable still.  The Radar Logic RPX OTC derivatives are showing similar declines in US housing prices.

	Spot Index
	Published	Futures Settlements
SPCS Index	Apr-08	Nov-08	Nov-09	Nov-10
	160.31	153.2	153.2	149.8
Boston	Δ to Spot	-4.4%	-4.4%	-6.6%
	153.33	143.4	137.0	135.0
Chicago	Δ to Spot	-6.5%	-10.7%	-12.0%
	127.5	117.6	115.0	113.0
Denver	Δ to Spot	-7.8%	-9.8%	-11.4%
	177.18	141.0	138.2	126
Las Vegas	Δ to Spot	-20.4%	-22.0%	-28.9%
	214.83	175.0	161.6	154
Los Angeles	Δ to Spot	-18.5%	-24.8%	-28.3%
	218.74	185.4	175.0	170.8
Miami	Δ to Spot	-15.2%	-20.0%	-21.9%
	198.46	188.2	172.8	168.2
New York	Δ to Spot	-5.2%	-12.9%	-15.2%
	190.34	165.8	155.6	150.4
San Diego	Δ to Spot	-12.9%	-18.3%	-21.0%
	174.54	150.0	135.8	129.8
San Francisco	Δ to Spot	-14.1%	-22.2%	-25.6%
	207.05	184.0	174.6	169.6
Wash DC	Δ to Spot	-11.1%	-15.7%	-18.1%
	190.58	169.4	161.8	153.2
10-City	Δ to Spot	-11.1%	-15.1%	-19.6%

Source: TFS Derivatives, CME

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.

More Free Options From Lenders

Is this really the free lunch that is in fact free?

At the risk of confusing even a derivatives expert, the free housing puts that homeowners have received over the last many years can now be exercised into free lower-strike housing calls... and the original housing put is still be unexpired. 

It looks like homeowners - a class of housing put and housing call owners - are now able to exercise their free housing put without having to change the ownership status of the house nor abandoning the housing straddle position that was given to the buyer at purchase closing. 

A lender will renegotiate your mortgage to a lower principal-owed level.... They have lowered the homeowner's cost and price basis.  The homeowner effectively sells the house to the lender at original cost and rebuys it at the lower price level at not cost (without ever having to give up the house and eat some personal credit rating).  This is an even better scenario than the free straddles - the strike for the free call just got lowered without charge to the option holder. 

It's like owning a house that is floating price on the way down and fixed price on the way up.  At no cost.  Housing derivatives are unable to offer this product at no cost. 

Housing Derivatives Showing Still Lower Prices Ahead

TFS Derivatives Corp. produces the TFS Housing Metrics report.  Download 5142008_tfs_housing_metrics.pdf.  The TFS Housing Metrics report is the most complete weekly compilation of the US housing derivatives markets.  Housing futures and OTC swaps are showing much lower values still for US housing.  All of these values are tradable by professional investors.

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.

housing derivatives housing futures hedging case-shiller index radar logic rpx futures forward cme

Jose Canseco Exercises Free Housing Put Option

Reuters announced this week that Jose Canseco, a well-known US professional athlete and author, exercised his free housing put.  Mr. Canseco explained the exercise of his American-style put option:

"I do have a judgment on my home and it to me is very strange because it didn't make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else," he said.... "I decided to just let it go.""

The housing straddles offered in the US housing market were free to all "home buyers."  Mr. Canseco received a free straddle with this particular house he "bought."