CME Housing Futures

[guy2]

Quote from ssternlight:

I don't see any trades either -- on the CME site.

I guess pricing is based on this Case-Schiller index.

I wonder what kind of deal CME has with them -- much less how they derive their prices for each metro area?

Seems like there is a lot of room for fudging an index like this.

Having said that I like the concept. Be interesting to see what kind of spreads develop if it ever takes off.

I believe that S&P now "own" the CS index.

No room for fudging index because it is based on second sales at arms length.

 

[Pabst]

As I posted on October 3rd.

Quote from Pabst:

Because of the housing markets sheer size it makes a compelling asset class for risk transference vis a vis futures. However these contracts will attract zero institutional participation and alas die a quick death.

There's NEVER been a successful futures contract without commercial participation. Stock index futures may appear to be a bucket shop casino product but their cog has always been mutual fund hedging, program trading and portfolio insurance. A bunch of hedge funds or IB retail daytraders exchanging opinions does not a great contract make.

The biggest problem with these contracts will be the lack of a standardized underlying cash market. Ok, it's an index. An index of what? Commercials want exact contract specifications. They don't hedge oil risk. They trade Brent light sweet crude. Or not just wheat but hard, red winter wheat. No one wants to merely exchange price risk for basis risk.

Thus a cash settled housing index, albeit regional, tells a hedger little about what his specific correlation to the index may or may not be. An example. After 9/11 condominium prices in Manhattan fell sharply for several months, yet single family home prices in NJ, LI, CN, and Westchester rose. What good would a hedge in the NY housing future do a commercial in that scenario. Or what if because of high energy prices, smaller more fuel efficient city homes with closer commuting distances out-perform large homes on the fringes of metropolitan areas. The hedging needs of a suburban lender/builder/buyer are diametrically opposed to his inner city counterpart.

Back in the early 1990's the CBOT spent millions developing futures for the re-insurance market. Like housing, insurance is a humongous cash market with no central price discovery allowing commercials to transfer risk to speculators. These contracts also failed for much the same reason.

 

[guy2]

The problems that I see with new futures is a catch-22 and not what you describe. The catch-22 is that no one will trade them until there's liquidity and there won't be liquidity until everyone trades them.

IMHO - 9/11 is not a good example because you don't base strategies around shock events. Yes, shock events will always happen but those are not what you are planning for in a futures trading strategy - insurance yes.

 

[wilburbear]

Those in the U.S. that have a large gain in a house should be short these futures. They will then be able to capture and retain the gains on their house.

 

[Pabst]

You're missing my point. The example of 9/11 was not at all germane to my argument. Although of course hedging strategies revolve around shock events. Who the hell needs to hedge in a benign price environment. A record number of Index products traded last week. You don't think that the volume spike was related to increased volatility/exposure in the underlying?

Futures markets MUST attract hedgers. If RE lenders, developers, portfolio managers who have REIT's, investors ect. don't see a fungible correlation of the contract to real life exposure, then there's no product. If retail guys merely want to bet on RE prices then I'm sure betonmarkets.com or someone of the like can list these indices.

Quote from guy2:

The problems that I see with new futures is a catch-22 and not what you describe. The catch-22 is that no one will trade them until there's liquidity and there won't be liquidity until everyone trades them.

IMHO - 9/11 is not a good example because you don't base strategies around shock events. Yes, shock events will always happen but those are not what you are planning for in a futures trading strategy - insurance yes.

 

[guy2]

You don't develop strategies around shock events. You use insurance for shock events and strategies for market moves - in both volatile and benign environments. Benign environments lend themselves to option writing and volatile to futures trading.

 

[ssternlight]

Quote from Pabst:

You're missing my point. The example of 9/11 was not at all germane to my argument. Although of course hedging strategies revolve around shock events. Who the hell needs to hedge in a benign price environment. A record number of Index products traded last week. You don't think that the volume spike was related to increased volatility/exposure in the underlying?

Futures markets MUST attract hedgers. If RE lenders, developers, portfolio managers who have REIT's, investors ect. don't see a fungible correlation of the contract to real life exposure, then there's no product. If retail guys merely want to bet on RE prices then I'm sure betonmarkets.com or someone of the like can list these indices.

I agree. That's why I was a bit skeptical about how the index is calculated. The other problem I see is that you really need longer term 5 - 30 year contracts for this to make any sense. Betting on real estate prices on a month to month basis seems a bit arbitrary to me.

In any event, the proof will be in the pudding as they say. So far, initial interest is zilch...

 

[Pabst]

Guy, my point is, the contract specs SUCK! Have you seen the ridiculous nature of SPX and NDX SET prices. No one has a clue as to the value of these housing indices in the micro.

Quote from guy2:

You don't develop strategies around shock events. You use insurance for shock events and strategies for market moves - in both volatile and benign environments. Benign environments lend themselves to option writing and volatile to futures trading.

 

[guy2]

These are valid points but I feel that you are ONLY looking at the contract from the point of view of a trader. These contracts allow institutions to repackage the contracts into different products. For example, an insurance company could provide insurance against a fall in your house price. For a monthly premium you could lock in the appreciation of your house.

 

[Pabst]

I'm sure a Goldman Sachs or ABN would structure those types of derivatives anyways. The CME is really not cutting any new or improved ground here. At the end of the day the CME is an Exchange where hedgers meet speculators in a forum of risk transference. Like I said earlier: exchanging price risk for basis risk is not an acceptable do.

Quote from guy2:

These are valid points but I feel that you are ONLY looking at the contract from the point of view of a trader. These contracts allow institutions to repackage the contracts into different products. For example, an insurance company could provide insurance against a fall in your house price. For a monthly premium you could lock in the appreciation of your house.