HOUSING DERIVATIVES

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/Case-Shiller Index - April 2008 Release

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

IRS Rules For Real Estate Derivatives Investing

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.

Commercial RE - Managing Alpha With Beta

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.

Exchange-Traded Securities For Housing Prices

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

RPX Volume Exceeds $1 Billion

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.

Case-Shiller v OFHEO: More Analysis

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."

Real Estate Derivatives - Managing Landlord And Tenant

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.

Real Estate Derivatives - "Dot.Com" Time

An article in the Q1 2008 Journal of Real Estate Portfolio Management paints a compelling picture for the future of real estate derivatives.

Radar Logic RPX Report - March 2008

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).