HOUSING DERIVATIVES

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.

UK House Prices Down Next Three Years

Trading data from the UK is suggesting that UK house prices will fall 20% by 2011.  Naked Capitalism has a follow story.

Tradition Sees UK Housing Prices In 8 Year Slump

Today, Tradition Financial Services, Ltd. released their Tradition Future HPI, a leading UK housing price index.  Download press_release_v3.pdf .  The forward curve of the OTC derivatives market in UK house prices drives the Tradition Future HPI indices. The Tradition Future HPI shows one year through eight years forwards are priced below the current (spot) HPI benchmark.

Commenting, Peter Sceats, Director of the real estate division at Tradition, said:

"The Tradition Future HPI indices illustrate the pressure UK house prices are under. Those who trade UK house price derivatives fore-see the credit crunch having a longer impact on the housing market than previously predicted."

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 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? 

Housing Derivatives - First UK Residential Exotic Derivative Trade

Reuters reports that Morgan Stanley traded an exotic swap based on the Halifax House Price Index.  The derivative includes a "knock-in" put option.

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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Housing Futures & Derivatives - Taking A Financial View On US Housing Prices

There are several financial securities available for expressing a view on the US housing market.  They are all notably different, in that they cross equity, fixed income and "commodity" asset classes.  Because of these differences, the change in housing prices and the change in value of these other financial instruments may be moving in parallel universes over a period of time.  They are all members of the same "real estate" family but may arrive to different places financially.

The core products available for expressing a view in real estate markets are as follows:

• Direct Investment
• Equities
• Residential Mortgages and ABX Indices
• Housing Futures and Forwards

The advantages of housing futures and forwards are:

• Pure play on housing market
• Transparency
• Simple or complex to suit
• Allow for national, regional or specific MSA exposure

The major disadvantage right now to US housing futures and forwards is its untested trading liquidity.  When trading liquidity grows in breadth and depth, then housing futures and forwards will fulfill its potential.

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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Housing Futures & Derivatives - First Japan Property Derivatives Trade

A Japan index real estate derivative traded between Royal Bank of Scotland and Grosvenor, marking the first ever property derivatives trade for Japan.  The index was supplied by IPD, the leading real estate derivatives index provider for the UK and European markets. 

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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Housing Derivatives - $4 Billion Traded To Date In UK Housing Derivatives

Reuters is reporting that a UK investment boutique is launching a UK residential housing derivatives fund.  The fund would use derivatives that trade on the UK Halifax House Price Index.   

"...We are the first to launch a residential derivatives fund based on the HHPI which is a conservative market tracking product that can be leveraged, or non-leveraged, according to investor requirements," ABFM founding partner Robert Page said in a statement.  The note said there had probably been about 2 billion pounds ($4.02 billion) notional value traded on the Halifax index to date -- less than a third of the cumulative notional value recorded in the UK's commercial property derivatives market."

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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TFS Launches Housing Index

TFS London launched today indices designed to illustrate the estimated future house price in the UK.

The indices blend the forward trading curve of HBOS plc's Halifax House Price Index to the current average house price in the UK. The current house value is GBP 183,645 - below is the TFS Future House Price Index:

TFS FHP Indices	Mid-Point
Thru Dec-07	£191,450
Thru Dec-08	£194,985
Thru Dec-12	£213,028
Thru Dec-15	£228,638
Thru Dec-20	£259,399
Thru Dec-25	£300,260
Thru Dec-30	£354,435

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