Neighborhood Inscope

Using CME Case Shiller Home Price Index Futures And Options To Express A View On Denver Home Prices

By John H. Dolan

Mon Jul 15 2019

I’m John H. Dolan, and I’ve been the market maker for the Case Shiller futures for much of the last eight years. Dr. Denver is allowing me to have a guest post on possible future prices for the metro Denver real estate market.

Readers here seem concerned that Denver home prices might be in a bubble and could fall 10-20%. After all, Denver home price indices have doubled from price levels seen in 2010 and average sales prices are up >100%.2













What’s a reader to do?  It may not be convenient to sell your home and move to a rental (and you can’t sell half your house), and many stock market hedges may only be indirectly related to home prices.

However, there is a product that allows for more of a pure play on forward home prices -the Case Shiller home price index futures and options that can be traded on the Chicago Mercantile Exchange (CME).

CME contracts are structured to allow users to express a view on where a regional Case Shiller home price index will be at some point in the future.  There is a contract for Denver (DEN)3 and there are 11 maturity dates that range (today) from Aug 2019 to Nov 2023.4

The table below shows the current (“spot”) index of 221.53 and bids and offers on 9 of the 11 contracts.  (Any of the expirations can be traded but I’m trying to focus interest on the Nov ’20 and ’22 contracts.) 

The bid and offer prices are converted into % over spot. For example, the bid on the DENX20 contract (that expires in Nov 2020) is 230.0.  That’s a premium of 3.8%, consistent with future prices being higher than today.

A user selling (“shorting”) one contract would gain $250 for every point the index released in Nov2020 was below 230.  So, for example, if the index value in Nov 2020 was 222 (almost unchanged with today) the user would have a $2,000 profit per contract.  (The economics work the same going the opposite way if index values rise above 230.)

Note that the contracts “cash-settle” which means that the settlement value is the index value released at the end of the expiration month.  That is, there is no obligation to unwind a position before settlement, or to worry about delivery of something at expiration.

To trade, users need to have a futures account5.   Each contract has a notional value of $250* price, or about $57,500 per contract, but most brokers require an initial margin of <10%. (Note that if contract prices rise a short position will have to post more margin).

For users that may be concerned that index values might go higher, put options may be an alternative.

Puts allow a user to pay an upfront fee (“premium”) that is their maximum exposure to prices increasing.  Puts cap the downside in that they give the user the option to sell a futures contract at the strike price, at the expiration of the contract.

For example, in the table below, one could buy a put on the DEN contract for Nov 2020 with a strike of 230 for 10 points.  (The 10 points has the same values as above $250/point).  That means that most the put buyer could lose (absent broker fees) is the 10 points -even if the index rises above 250.  At the same time, they gain point-for-point, (in this example) with every drop in the settlement price below 230.


Between futures and options then, there are two ways to play for a decline in Denver home prices.6

Feel free to review my April 17th blog (“How to get started trading CME Case Shiller futures”), contact me if you have questions, please feel free to sign up for email alerts to new posts ^8, and/or follow me on Twitter (@HomePriceFuture) if you’d like to learn more.

Thanks,

John


  1. Case Shiller non-seasonally adjusted index
  2. Zillow average seasonally adjusted sales price
  3. In addition to the Denver (DEN) contract, there are contracts for BOS, CHI, LAV, LAX, MIA, NYM, SDG, SFR, WDC and a 10-city index contract
  4. Note that there are many different home price indices and that they may perform differently from each other.  These contracts reference the Case Shiller NSA (non-seasonally adjusted indices). Index values are updated on the last Tuesday of every month.
  5. Interactive Brokers and Insignia Futures are two futures broker that allows trading in these contracts
  6. Note that none of the above should be construed as investment advice.  The article provides an overview of how the contracts work.  Please consult your financial adviser for any advice on whether the contracts are suitable for you, and how you might use them.