CME Housing Futures

[cooperthedog]

These are relatively new offerings (futures and options) from the CME (Chicago Mercantile Exchange). They are indexed to real estate prices for major US markets, including San Diego.

Does anyone trade these derivatives?

I assume that these would be a good tool for some of the more daring members of this board. I’ll append the pertinent data from another post (More Lies from Alan Gin), regarding these futures:

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Here is a link to a chart of the Aug06 San Diego contract:
http://chartsrdc.cme.com:443/cs/charts.jsp?_symbol=SDG&_month=-1

Note that these contracts are indexed to the Case-Shiller data, which is generally regarded as an accurate indicator of overall housing prices. I’ve appended the index values for San Diego since 2004:

January 2004 186.33
February 2004 189.89
March 2004 196.40
April 2004 203.64
May 2004 210.94
June 2004 218.18
July 2004 224.22
August 2004 227.67
September 2004 230.64
October 2004 232.28
November 2004 232.63
December 2004 233.08
January 2005 233.78
February 2005 235.64
March 2005 236.56
April 2005 239.58
May 2005 242.00
June 2005 245.35
July 2005 247.33
August 2005 248.45
September 2005 249.03
October 2005 249.79
November 2005 250.34
December 2005 248.55
January 2006 247.46
February 2006 247.89
March 2006 248.09
April 2006 249.35
May 2006 249.15

Note that the CME Aug06 contract is trading at ~247 and May07 at ~242 (1% & 3% declines from May06, respectively).

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So it appears that market participants are not expecting a dramatic decline in overall housing prices in the next year.

For those that strongly disagree (and can tolerate the significant risk that futures involve) the potential for substantial profit exists. While those homebuyers who may be concerned about a recent purchase can hedge their exposure (of course, if the overall market remains flat, but your property decreases, you still lose, and if the overall market increases, you lose twice).

On that note, do NOT consider trading futures unless you fully understand how these derivaties work, the risks involved, and how they apply to your particular situation.

The CME site has alot of good introductory material on these derivatives, including Case-Shiller data since 1987, which shows the top in 1990 and bottom in 1995.

[sjk]

Thanks for posting this….I have looked at these contracts in the past but I found the volume to be very thin.

Do you know if they have options on the contracts yet?

Regards,

[lendingbubblecontinues]

From the Alan Gin thread….I move my question over here:

Submitted by lendingbubbleco… on July 25, 2006 – 3:26pm.

I am curious about what the Options and Futures markets for the major stock market indices (SP500, NASDAQ, DOW) looked like heading into 2000, 2001, 2002. Seems there was an awful lot of optimism back at the end of the Nineties…since an awful lot of prognosticators seem to have gotten it wrong back then, wouldn’t it have made sense that the futures markets might have looked eerily similar to what the CME housing market futures look like today ?(you know…predicting extremely modest declines of 1-3%, but no major risks ahead)

Just curious..I do not have the facts with me, just questions.

[Anonymous]

Thanks for the info. This is a great concept, but right now I don’t see enough volume in these futures, nor sufficient choices to make this a practical investment option.

For those of us who are more daring as you put it, and are confident of the bubble burst, homebuilder shorts and puts have been extremely lucrative, and will continue to be. I’m up over 50% since January, and it’s going to get much better in the coming year.

I’m not sure why more people don’t do this, it is the “no-brainer” of the century in my opinion.

[Anonymous]

Chris Johnston

There is no volume at all in the housing futures contracts. I trade more contracts every day in my own accounts by far than the total amount traded there. Do not bother with that until volume increases dramatically.

The only way that will happen is the homebuilders shorting them. I have a feeling they do not want to do it publicly for fear of inciting fear into the market. It does not matter anyway because there would be nobody to take the other side to enable them to get a fill on any large enough size to help them hedge.

[powayseller]

Bill Fleckenstein advised a subscriber to NOT short the homebuilders. I posted the question and responses before. I also agree they will keep going down, and many factors can intervene to make the stock price go up, and cause you to lose the money. Veteran mutual fund manager Bill Miller buoght up a bunch of homebuilders, saying they are value plays. We could see consolidation, buyouts, an earnings surprise, and these would cause a temporary price spike. Even the Fed pause can cause a price hike. Althoug the long term trend is down, a temporary price hike, or dead cat bounce, could make you lose your shorts, so to speak 🙂

Chris J, why does Fleck recommend shorting only AFTER the Fed pauses? Is it because we will have a rally? The rally can wipe out your short position, right?

Following is a Q&A, and 2 quotes from a guy who shorts for a living.

Q: What do you think are the drawbacks, if any, of shorting LEND now?
• …that you could get squeezed hard in a rally.

Q: With the serious slowdown in MEW (mortgage equity withdrawals) and the obviously slowing housing industry – what do you think about shorting some of the big hardware type retailers?
• Could be a good idea… AFTER the Fed backs off.
there will be more money short the guys who have lent against real estate, IMO… so they are better targets.

the long side is way, way, way easier… and the gains can be far bigger.

As for housing FALLOUT, I prefer the lenders against home as collateral. THAT is where the real wipeouts will occur in my opinion, so I decided to do them instead of housing stocks.

[VCJIM]

Poway, you bought shorts against home collateral lendors?

[Anonymous]

Chris Johnston

My guess would be because he thinks a rally could occur once the pause takes place. These stocks are very undervalued at the moment. I have spoken repeatedly about the odds being better about shorting stocks with higher valuations than these. I know the one guy claims to be making a mint shorting these, and maybe he is.

However, a guy like Fleckenstein takes postions for long periods. He wants to develop a big picture view for a short, and then sell on strength into that position. He will then more than likely add to his shorts on strength and hold on come hell or high water. He is not a momentum trader.

However, this is just a guess. I do not know him, even though I think he is very sharp. His track record is pretty good.

[powayseller]

VCJIM, the entire last portion of the post is QUOTED FROM BILL FLECKENSTEIN. I do not short anything; I am a very simple investor. Shorting and options are way too risky.

To repeat, the following ENTIRE quote is from Fleck:

QUOTE
” Q: What do you think are the drawbacks, if any, of shorting LEND now?
• …that you could get squeezed hard in a rally.

Q: With the serious slowdown in MEW (mortgage equity withdrawals) and the obviously slowing housing industry – what do you think about shorting some of the big hardware type retailers?
• Could be a good idea… AFTER the Fed backs off.
there will be more money short the guys who have lent against real estate, IMO… so they are better targets.

the long side is way, way, way easier… and the gains can be far bigger.

As for housing FALLOUT, I prefer the lenders against home as collateral. THAT is where the real wipeouts will occur in my opinion, so I decided to do them instead of housing stocks.”

UNQUOTE

The above was entirely quoted by Fleck.

[VCJIM]

Sorry, my bad. Was reading too late at night : )

[anxvariety]

There is no volume at all in the housing futures contracts.

Exaggerate much?

[powayseller]

The volume in those is too low to allow you an exit at the market price. They are too illiquid. That’s one reason to avoid them right now.

[anxvariety]

Illiquidity is factored into the price.. You make it sound like market price is disconnected from volume or as if it’s some magic-pre-determined price.. market price is just what someone else is willing to buy it for.. not much demand I guess.

[Daniel]

Yes, the volume is quite pathetic. But that may change in the future, who knows.

Regarding the CME housing futures, I have a couple of tough questions regarding the index calculation: first, can they take into account rebates (such as help with closing costs)? Based on my personal observations, these average about 2% of purchase prices right now in SD, up from nil the years before. Second, how in the world can they account for improvements? I know they do all sorts of analyses and outlier elimination to weed those out, but I think it’s next to impossible to come up with an accurate picture. Say I buy a $500K house, I put $100K of improvements on it, then sell it for $580K. For the purpose of the index, did the house increase in value by $80K? Did it decrease in value by $20K? Somewhere in between? It’s a hard question; I have no idea what the correct answer would be.

I’m sure they do the best work they can to come up with an index that is as accurate as possible. I’m just not sure that even the best effort could capture all features of the market.

[Anonymous]

Lack of volume is bad because there is no guarantte you’ll be able to sell it at market price when you want. On the other hand, Put options on major homebuilder stocks are a much better method to take advantage of the real esate crash because there is a lot of buy/sell activity.

[Author]

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