HOUSING DERIVATIVES

Time Magazine Weighing In On Housing Derivatives

Time magazine trumpets a housing derivatives / etf announcement.  It's better than Michael Phelps' Speedo race suit (no. 26).  Get out there and trade.

Modelling Forward Housing Price Volatility

Alex Levin of Andrew Davidson & Co. has developed a model that demonstrates an increase in volatility in housing price changes as one travels forward in the future.  The HPA model is made of 3 terms, called jumps (instantaneous volatility), diffusion (market factors other than interest rates), and rate dependence (housing affordability). The model is built off OFHEO US all-transaction index.  This should create more options trading opportunities in the housing derivatives markets.

  

Comparative contributions of Black volatility terms

 

Levin states that the SPCS volatility is higher than OFHEO, but has a similar term structure pattern: it grows almost linearly with option expiry, for most geographical segments including the 10-city composite.  He will publish details of these findings in the upcoming November Pipeline (AD&Co’s monthly newsletter, www.ad-co.com).

Source: Alex Levin, Andrew Davidson & Co.

More Housing Peak-To-Spot Housing Price Analysis

Additional S&P/Case-Shiller Index peak to spot analysis.  

Boston: Looking At The Indexes

Paper Economy has an excellent post that looks at the Boston housing price history in index and historical perspectives. 

S&P/Case-Shiller Home Price Index - August 2008 Release

S&P/Case-Shiller Index - August 2008
CME	Jul 08	Aug 08		Jul 08 v Aug 08	Jul 08 v Aug 08		Aug 07 v Aug 08	v Peak
Bos	162.58	162.75		0.17	0.10%		-4.7%	-10.8%
Chi	149.60	149.53		(0.07)	-0.05%		-9.8%	-11.3%
Den	132.67	132.64		(0.03)	-0.02%		-5.1%	-5.4%
LV	154.15	150.52		(3.63)	-2.35%		-30.6%	-35.9%
LA	192.55	189.18		(3.37)	-1.75%		-26.7%	-30.9%
Mia	186.84	183.48		(3.36)	-1.80%		-28.1%	-34.7%
NY	193.30	192.84		(0.46)	-0.24%		-6.8%	-7.4%
SD	172.20	168.23		(3.97)	-2.31%		-25.8%	-32.8%
SF	156.88	151.42		(5.46)	-3.48%		-27.3%	-30.7%
WDC	195.48	194.86		(0.62)	-0.32%		-15.4%	-22.4%
10-C	178.56	176.60		(1.96)	-1.10%		-17.7%	-22.0%
	Jul 08	Aug 08		Jul 08 v Aug 08	Jul 08 v Aug 08		Aug 07 v Aug 08	v Peak
Atl	125.08	124.82		(0.26)	-0.21%		-8.5%	-8.5%
Char	133.20	132.10		(1.10)	-0.83%		-2.8%	-2.8%
Clev	109.37	110.54		1.17	1.07%		-6.6%	-10.5%
Dal	123.16	122.90		(0.26)	-0.21%		-2.7%	-2.8%
Det	93.21	92.44		(0.77)	-0.83%		-17.2%	-27.2%
Min	143.39	141.94		(1.45)	-1.01%		-13.5%	-17.1%
Pho	149.09	144.83		(4.26)	-2.86%		-30.7%	-36.3%
Port	174.21	171.93		(2.28)	-1.31%		-7.6%	-24.4%
Sea	176.51	175.24		(1.27)	-0.72%		-8.8%	-8.9%
Tamp	175.07	174.30		(0.77)	-0.44%		-18.1%	-26.8%
20-C	166.29	164.57		(1.72)	-1.03%		-15.9%	-20.3%

Trading Housing Derivatives

Tradable housing derivatives have been available to the public since 2006.  The CME lists futures and options on 10 S&P/Case-Shiller Home Price Indices.  Since last year, there have been actionable trades and transparent settlements for futures contracts for these 10 cities going out through November 2012.  RPX swaps were launched last year and those markets showed a clear downward view in housing prices.

Housing derivatives markets Download 10212008_tfs_housing_metrics.pdf are still pointing to lower net asset values for the US housing stock.  These futures showed systemic lower values as early as June 2006.  They were even in front of the popular ABX indices in many instances.

These derivatives will probably be the first ones to show a bottom in the housing market. 

Housing futures, options and forwards are tradable for 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.

Eurex To Launch IPD Real Estate Derivatives

Eurex is launching IPD futures in 1Q 2009.

"... Ian Cullen, IPD’s co-founding Director, commented, “Since the growth in the use of OTC property derivatives began in 2004, IPD’s central aim has been to support all market participants to the best of our abilities. We have become convinced over the past months that this exciting new market is now ready for the boost that can be provided by the introduction of standardized, homogeneous on-exchange products and services, and that Eurex will be a sympathetic partner in facilitating the next logical stage in the development of this new market.”...."

Housing Derivatives - Now What

Wake up call.  Look at and trade housing derivatives.  Seek them out.

Housing derivatives are financial contracts that use housing price indices for settlement.  The first index available for trading was launched in May 2006 was the S&P/Case-Shiller (SPCS) Home Price Index.   SPCS housing futures and options contracts are traded transparently on the Chicago Mercantile Exchange.  Since the 2006 inception, the forward markets for housing were lower.  Save for the first week of trading, the future housing market has always pointed lower.  This housing price fall we are experiencing was "predicted" and traded upon for over two years now.  It was and is open for all to see.  A second index launched for trading was Radar Logic RPX in September 2007.  Since the RPX launch, the RPX forward swap markets were always pointing down. 

Housing derivatives markets saw the housing NAV depreciation in the US housing market early, clearly and transparently.  All investors and government officials had and have access to these markets.

These same markets are earlier than almost any other economic metric in showing the tops and bottoms in US housing.

CME futures and options contracts are listed.  RPX swaps and forwards are OTC.

US Home Price Securities - Getting Closer To Launch

MarketWatch is reporting that MacroShares Housing Depositor LLC today filed an amended prospectus with the Securities and Exchange Commission to offer exchange-traded securities linked to the movement of U.S. home prices. The securities will be listed on NYSE/Arca following their planned initial public offering.

"MacroShares Major Metro Housing will provide investors with much needed access to the housing asset class, allowing for investment in either the upward or downward movement of home prices. The securities are designed to track the change in U.S. Home Prices as measured by the closely-followed S&P/Case-Shiller Composite-10 Home Price Index through the termination date. The paired securities will have a ten-year term and will feature a 2x (200%) leverage factor."

Altos Research sees a November 3, 2008 launch date.

 

SeekingAlpha likes this new product.  They look at housing portfolio allocation.

 

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.