I received an interesting email this morning from John Dolan, who runs a web site at homepricefutures.com. I’m somewhat obsessed with the future of home prices, and if you count your home as one of your prime assets and biggest investments, I’ll bet you have at least a passing interest in future home prices as well!
Here’s (a slightly edited version of) his email:
I’m John H Dolan, the sole market maker for the Case Shiller (CS) home price index futures that are (VERY infrequently) traded on the CME (Chicago Mercantile Exchange). I support/tout/make markets in these contracts/ as I think there should be a place where: 1) people can express their views (financially) on where they think the CS index will be 1-5 years from now, but as importantly, 2) so that others can freely see, in real time, where people are willing to buy or sell these contracts on forward index values.
There are 11 contracts –one for the CUS 10-city index, and then one for each of the ten component areas. No surprise, there’s a contract that covers San Francisco* (as defined by the Case Shiller index definitions). In being a repeat-sales index, that was originally conceived in the 1980’s, CS requires numerous actual “trades” (home sales). As such, their index calculation is an average over three months and over a broader geographic region).
The graph to the left shows the historical CS SFR (Single Family Residence) index (in black) the recent closing prices on the CME contracts (in purple), current bids (blue x’s), and offers (red +’s). There are 11 expirations by region from Feb ’17 to Nov ’21. As expiring contracts roll off they are replaced.
I’d also note the recent “noise” in the SFR contract where I’ve added the closing contract prices as of Aug 31, 2016. Forward prices have dropped in SFR more so than any other contract (see this blog post for a more detailed discussion). Now while that may be some of the fundamental issues that you’ve highlighted (e.g. rising interest rates, on an area that is already unaffordable to most), and forward prices may end up settling below today’s index values, it could also just be that the one person looking to hedge (that I am in touch with) wants to sell more than I (as the last buyer) can buy. In that case the SFRX20 (Nov 2020) contract, which is offered at 7% over spot prices might be bargain.
No one can know, but that’s a function that markets can provide, to (financially) express disagreements at a centralized location (OK, an electronic platform). If the parties are willing to trade at a price, then they each are hopefully gaining some value.
I’d love to get my message out to a wider audience. Feel free to use this graph, or any posts on my website. I’d be happy to answer any questions you, or your readers, might have about the contracts.
John H Dolan
Independent Market Maker –CME Case Shiller Futures & Options
I’d also like to point out that Robert Shiller himself is also a moderator of the CME Case Shiller Home Price Futures group on LinkedIn, so if you join, you’ll be in good company! Of course, where home prices are headed in California over the next several years is anyone’s bet. If you do actually want to bet on it (aside from owning real estate here, of course!), you should check into Home Price Futures.