Real Estate Derivatives

Getting closer to reality: Yesterday Bob Shiller's firm MacroMarkets announced that they've cleared the final approval for their exchange-traded funds based on the Case Shiller Index.

I've written in the past how huge this is. You can finally stem your real estate losses in a falling housing market. Or you can bet on the return of the market. And it's as easy as buying a stock on e-trade.

From the press release

MacroShares Major Metro Housing will provide investors with much needed access to the housing asset class, allowing for investment in either the upward or downward movement of home prices. The securities are designed to track the change in U.S. Home Prices as measured by the closely-followed S&P/Case-Shiller Composite-10 Home Price Index through the termination date. The paired securities will have a ten year term and will feature a 2x (200%) leverage factor.

...

Robert Shiller, co-founder and Chief Economist of MacroMarkets noted, "As recent events have proven, our global economy will benefit from modern, transparent, market based risk management solutions. Ongoing private sector innovation remains a vital complement to governmental efforts to modernize and protect our financial institutions, and I am confident that MacroShares will help meet a key 21st century economic challenge: delivering greater market access, new price discovery and liquidity to real estate."

Case Shiller based options and futures have been listed on the Chicago Merc for several years now. But the mechanics of that trade and account system have made it virtually impossible for anyone outside of Wall Street (aka the "End Users") to take advantage.

The funds are scheduled to IPO November 3. They'll trade with NYSE:UMM (which goes up when home prices go up.) and NYSE:DMM (which goes up when home prices decline)

These are unique financial instruments. In particular they don't own any real estate assets. This is not like a Gold ETF that buys gold and keeps it in an Amsterdam warehouse. Rather these funds hold cash (or treasuries). The cash moves from one to the other depending on the movement in the underlying Case Shiller 10-city composite. There are other peculiarities of these things too, but suffice it to say that these are the simplest, most direct way (only way?) to make money in real estate without going out and buying physical property. More complete review is here.

Obvious disclaimer: don't take my advice about financial instruments or investing.

Here are the Case Shiller Index numbers released today for July. No big surprise. Down of course. One percent more this month. Down 17% from July 2007. As I've been saying in the press lately, we've seen no signs of a bottom. Even before the crisis of the last couple weeks, pricing through September continues to be down sequentially.

As we've already measured, the next three months of the Case Shiller numbers continue their fall at the same pace. Price decreases through September have not accelerated. There are no signs of market inflection points yet either. Days on Market is climbing and Inventories are flat at best. Contact us if you want specifics on the CSI for a given future date or a given MSA market.

Our National Report for September data comes out later this week with the current view on the market rather than the backward looking stuff released today. Stay tuned for details

The other day, I highlighted the announcement from Bob Shiller's MacroMarkets to list exchange traded funds on the housing market. I've now had a chance to investigate more deeply and I'm giddy like a schoolgirl. (Albeit an incredibly geeky schoolgirl, but giddy nonetheless.)

First, some foundation as to why this matters.

In all businesses you have risks you can control and costs you can't: food, energy, interest rates, etc. For those costs, it makes sense to hedge. Successful jet fuel hedges are a big reason Southwest Airlines is the strongest in the country. Consumer products (e.g. cheaper airline tickets, wacky mortgages) get created on the foundation of these tools. (i.e. derivatives are a good thing.) Speculators can also participate - they add potential return to their portfolio where a hedger removes risk. Speculators create liquidity for the hedgers. (i.e. speculators are a good thing.) Financial derivatives, futures, options, swaps, etc. exist in nearly every asset class to solve these problems for people.

Likewise, lots of people and companies have real estate "exposure". This is a $21 trillion asset class people. You should be able to hedge. Especially now, people realize housing prices don't always go up. But before 2006, there were no financial products that let you hedge your real estate risk. And the only way to speculate was to buy investment property.

In 2006, MacroMarkets introduced, on the Chicago Merc, housing derivatives. Unfortunately it turned out that there were practical limitations on the housing futures that prevented nearly all potential "end-users" from participating. (The big banks could trade amongst themselves, but how fun is that?) Namely, you need big capital requirements, special trading accounts, most of the time you need a broker-dealer on the other side of your trade, and the payoff is not significantly leveraged. Perhaps I was a bit harsh to characterize MacroMarkets as having "dropped the ball" but, as of today, mere mortals basically still can't hedge their real estate risk. So how do you eliminate these hurdles?

Enter Exchange Traded Funds

ETFs are securities that trade like stocks on stock exchanges. You can play the oil price trends or diversified stock market positions simply buy buying a single "stock".

Here's how MacroMarkets' new ETFs ("MacroShares" as they call them) work for the housing market:

• The shares will list on the NYSE Arca. You can buy them from any brokerage account, like you would any stock.
• They're designed to follow the Case Shiller Index - specifically the CSI 10-City Composite, the national index. more on the implications of this below.
• The shares are issued in pairs: ticker symbol NYSE:UMM goes up when housing prices go up, NYSE:DMM goes up when housing prices go down.
• Like any stock, there's a market specialist so you always have price liquidity. You don't need to line up Goldman or Merril to take the other side of your bet.
• The shares have a par value of $25/share so when the market is heavily bearish the DMMs will trade at a premium to the $25.
• They have a 10-year horizon so you can play the longer term cycles of the housing market.
• The underlying assets get parked in short term US Treasuries, so the securities actually return a quarterly dividend.
• So the very easy trade is if you're bearish, simply buy the DMMs. Think you're seeing the bottom? Buy the UMMs. Ahh... simplicity.

Exercise some caution however, because there are nuances of how these things will behave. Namely:

• They trade in pairs that offset each other. This means if home prices double, the DMMs will go to zero and the security closes out. This happened in MacroMarkets oil MacroShares this year. AMEX:UCR and AMEX:DCR. (Those securities have market values in the billions now, so people are obviously adopting them as useful instruments.)
• That means also that the upside is limited to a 100% move. You can improve your return with margin leverage like any stock.
• As these things approach close (because of A. time or B.100% market moves) the pricing will exhibit optionality. They'll behave less like the market and more like an option.
  

But is the Case Shiller Index Useful?

The remaining challenges for these products are oriented around the data. It's easy to bitch about the Case Shiller Index: doesn't include condos, or new construction, or flips, etc., etc., etc. Add in local market peculiarities and a lot of people wonder if the CSI actually measures the housing market.

My take on this argument is that Case-Shiller is not useful for making a home purchase decision. But that doesn't preclude its usefulness in financial instruments. The fact is that the CSI 10-City Composite peaked in June 2006, and that's widely regarded as the national turning point for this housing market cycle.

The classic example of the localness problem came when Brad Inman asked Bob Shiller on stage and his conference in Miami, "So let's say I bought a $2 million home in Sausalito in 2005. How would I hedge that?" Ill distill Shiller's 10-minute-Yale-finance-prof reply into two words for you: "You can't."

With Given that these new securities are based on the CSI 10-City Composite, which is down strong in the last 12 months, they're not going to be helpful to hedge in Sausalito, which is doing just fine, thank you.

But if you're a reasonably diversified investor, brokerage, lender, builder, supplier, or yes, even if you're a speculator, this is a great way to measure US housing broadly. Given success in the market, there's no reason why they can't list regional funds too at some point in the future, to get a little closer to home.

Finally, of course, the backward-looking nature of all typical housing market data presents opportunities for clients of the Altos real-time real estate data. Rock on.

This is big, folks. Huge.

I don't imagine that this innovation is going to save anyone from foreclosure. But we're looking at the only effective way to manage your real estate assets without physically selling off properties. Think about that. Won't that be amazingly useful?

Look for these to get listed sometime in Q3 or Q4 2008. You can be sure that we'll be watching, and of course publishing data to help you trade.

More coverage: Here, here, and here.

MacroMarkets today announced that they'll be issuing New York Stock Exchange-traded securities for investors to play the US Housing Market. From the press release:

MacroShares Housing Depositor, a subsidiary of MacroMarkets LLC, filed with the Securities and Exchange Commission for exchange-traded securities
that will allow investors to invest in the upward and the inverse movement of U.S. home prices. MacroShares Major Metro Housing Up and Down securities will be based on the S&P/Case-Shiller Composite-10 Home Price Index and will allow investors to access this important, but illiquid, asset class. When launched, these revolutionary paired securities will have a ten-year term and will feature a 2x (200%) leverage factor. MacroMarkets LLC plans to launch the new securities on the NYSE Arca under the ticker symbols:

• UMM- MacroShares Major Metro Housing Up
• DMM- MacroShares Major Metro Housing Down
  

Looks to me like an ETF, which would be ideal for lowering the transaction costs and the capital requirements that have been dogging the commodities-exchange traded securities. ETFs, remember are exchange traded funds so you can invest pretty directly in an underlying asset class. In oil, for example, you can trade with the ticker symbol USO traded on the Amex.

In the couple years since launching the Chicago Merc-traded housing futures based on the S&P/Case Shiller Index, MacroMarkets is widely acknowledged to have dropped the ball. The traded volume on these markets is tiny and was restricted by steep license fees that MacroMarkets tried to extract from the Street. This winter, MacroMarkets sold to S&P the master license of the Index and droped the license fees. That was Step One. Step Two is to get products into the hands of the people who can use them. It looks like MacroMarkets is focusing on Step Two. Let's hope they learned their lesson and this product gets the volume it deserves.

While we have yet to see these securities trade on the NYSE, they're based on the Case Shiller 10-City Composite, which is good news for Altos (and our customers). We publish the Altos 10-City Composite which, whattya know, follows the same 10 cities.

Altos Research 10-City Composite and 25-City Composite. US Residential Real Estate prices as of June 8 2008.

Our Real Estate Derivatives weekly report is now available to subscribers who want to know where these indexes are heading with a 90-day lead. Beyond just pricing, the reports dive into all the detail real estate data: supply and demand levels, turnover, etc. If you're interested, contact us.

Meanwhile, I'm keeping my fingers crossed to see some trading volume.

MacroMarkets released the monthly Case Shiller Index today. Case Shiller tracks repeat sales of single family homes. Like most real estate data (except ours of course) the Case Shiller lags the actual market by several months. This is data for March 2008.

Nationally we saw a less-steep price decline in the last few months than we did at the beginning of the year.

As a bonus, let's look at the Denver chart. The Denver metro actually defied the national carnage until October of last year. Case Shiller picked that up too and you can see that Denver is the smallest of the declines in the sample. We've actually seen a small uptick in Denver pricing this spring. (Don't be fooled by the scale on this chart. With the tight scale, it looks like a rocket, but it's only a few thousand dollars difference.)

Home price trends in the Denver metro market for the 12 months ending May 2008. The tight scale on this chart makes it look stronger than it is, but at least it's not falling through the floor.

See also:

• This post about trading real estate derivatives on the Case Shiller Index and our real time data.
• To inquire about our Weekly National Market Report: email us

The February Existing Home Sales numbers were released yesterday by NAR. You probably saw the headlines. Home sales were, gasp, up!

Today the latest Case Shiller Index was released. In typical fashion, they're just getting around to telling us what happened in January. Guess what? It was ugly. Here, courtesy Fritz at TFS, are the 20 Case Shiller Markets vs. their market peaks.

Altos Links: For those of you with more than a passing interest in knowing thhe real estate data before these lagging indicators get published, Altos has two things for you:

1. Our monthly national real estate report publishes in real-time the housing price trends for all the markets covered by Case Shiller. CSI for January was published today. The Altos National Real Estate Report for February and March have already been published. April comes out next week.
2. Our full real estate data feeds are for institutions that make a living in the housing markets. You can now get data feeds for nearly 10,000 zip codes in over 40 metro markets around the country. We're publishing now an Altos National Composite price for the same markets as the Case Shiller 10. This is important because the derivatives trades are being done on the national index.
   

No, I'm not talking about buying into the Trump Tower. I'm referring to what the Wall Streeters call synthetic investment. Get exposure in your vast financial portfolio to profits in the Manhattan real estate market via a derivative contract. And you never have to worry about dealing with property taxes, garbage collection, cockroaches, or Donald Trump.

On Wednesday, real estate derivatives firm Radar Logic announced their Manhattan Condos Index. Radar publishes these indexes upon which the derivatives contracts are based. Go long and you make money when the New York Condo market is strong. Go short and you make money when the Condo market in Manhattan tanks.

This contract marks the first time a housing futures market has been local enough to accurately hedge against value declines in a specific property. If you already have your Manhattan pied-a-terre, you can lock in your gains.

This product is doubly sexy because most of the people likely to trade this index live in... you guessed it... Manhattan Condos. I'm really looking forward to seeing if they get some volume.

Altos Manhattan Condo Data

So how's the market? Since we publish data and reports for all the Radar Logic markets, on Thursday we released the Altos Manhattan Condos composite. Like all our real estate derivatives data, the Altos Manhattan Condo composite covers the same ground as the Radar Logic version, but watches the properties as they're on the market, so leads the index by several months. Here's what the Manhattan Condo market looks like:

Price per square foot for condos in Manhattan. Data does not include coops. Data as of February 28, 2008. The Radar Logic data is expressed as price per square foot and trades are paid on moves in price per square foot so that's what we're showing here.

Holding up nicely, eh? We'll see how this winter's credit carnage impacts the prices in Manhattan in the coming year. New York has an added dimension that most American cities do not: the cheap dollar means that rich Europeans are seeing bargains in NYC for the first time in a decade. That dynamic is adding to condo demand.

But even if you're not paid in euros, you can now get your slice of the action too. Rock on.

More details on our real estate derivatives products here.  Contact us if you want to see some sample data.

Back in New York this week for the Real Estate Derivatives World shindig hosted by Terrapinn. I know. Paaartay!

It's actually exciting for us as we're beta testing new data products we've designed especially for the real estate derivatives traders. Here's a quick glimpse of the Altos 25-City Composite Price, which tracks the Radar Logic 25 markets and the Altos 10-City Composite Price, which tracks housing markets covered with the Case Shiller national Index.

Altos 25-City Composite and Altos 10-City Composite home price metrics for major metros around the country. Data as of February 22 2008

Full product launch and details soon. If you're interested in the housing futures markets, we should be talking.

Link: Altos Real Estate Derivatives Data

Last week we published the February editition of our National Housing Market report [PDF download]. I was traveling and forgot to add it to the blog, so here it is. We've expanded the coverage this month and added a few more cities ebyond the initial 20 covered by the Case Shiller Index. We'll add a few more important cities in the upcoming versions of the reports too.

Here are the highlights from this month's report.

• Listing prices declined in 19 of 22 markets during January. Prices only increased in the New York metro area during January and were flat in Dallas and Phoenix.

• The largest monthly decline of 3.6% occurred in San Francisco. Over the three month period, listing prices in San Francisco have fallen by 6.1% from $708,551 to $665,100. The other California markets of Los Angeles and San Diego logged declines of more than 2% for the month of January.

• Property inventories declined in most markets except in the Northwestern markets of Seattle and Portland. Inventories tightened sharply in the Midwestern markets of Cleveland and Detroit with decreases of 10.4% and 5.4% respectively during January. Seasonal declines in listing inventories are typical during the winter months.

• Markets with the longest time-on-market are Miami and Minneapolis at an average of 144 days-on-market. Miami’s days-on-market only increased slightly from the previous month’s 143 days while Minneapolis jumped over 5% from 136 to 144 days. Sixteen of 22 markets had an average days-on-market of over 100.

• Denver led all markets with the fastest rate of inventory turnover at 61 days, followed closely by Dallas and San Diego at 80 days. The sharp decrease in Denver’s days-on-market indicator – almost 39% during the past three months – coupled with an inventory reduction of over 11% during the same period, should be a positive for listing prices in the coming spring selling season.

Jonathan Miller published the November Radar Logic RPX housing market report over the weekend. It's easy to spot that Sacramento is leading the nation down.

[aside: Radar Logic is cool. They measure Price Per Square Foot and try to do it across all properties, condos and single family homes, new and existing construction. No small task. The price per square foot approach is intended to measure value of the property regardless of the size of the property itself. In the real estate derivatives trading business, Radar is getting all the mindshare. Case Shiller is falling behind. more here.]

In the report just published for November, Sacramento saw a price-per-square-foot decline of 18%. Zowie. For those of you unfamiliar with California's central valley, this is an area dominated by lots of new construction, in huge projects, partly as Bay Area super-exurb. So the underlying economy in the Central Valley isn't nearly as dynamic as San Francisco, San Jose, or Los Angeles. Also much less dominated by the high-end, Sacramento is feeling the subprime fallout harder than most.

So Radar Logic is publishing for November. What are the real-time stats saying? Sacramento is not seeing any relief yet. Here's our price per square foot for Sacramento through February 1 2008.

Price Per Square Foot for single family homes in Sacramento, CA through Feb 1 2008. Notice the price is slightly higher than the Radar Logic number. That's because we track Condominiums separately and this is for the city of Sacramento specifically. The important factor is the direction.

Sacramento Housing Market Data Links:

Our free Sacramento Real Estate Research page

Here's a solid Sacramento Area Blog for more local flavor.

Money and technology are inseparable. Massive new tradable data sets are being exposed by the Web; new bottoms-up social networks are creating alternative ways of discovering investing ideas; a rising percentage of newswire content is being written and consumed by machines; new classes of monitoring services are revealing deep data that might otherwise go unnoticed and untraded for weeks; and real-time itself is being redefined.

"The conference is, of course, all about the confluence of Wall Street and Web 2.0. And what does that mean? Well, new ways of Web-2.0-style collaborating are changing money and investing, with the zero-sum game of Wall Street changing in the process. At the same time market mashups with new sources of web-based data -- auctions! real estate! pricing! weather! -- are transforming the never-ending hunt for a money-making edge."

I'll be presenting some data and observations on the Housing Futures markets, Case Shiller and Radar Logic RPX. Some cool stuff. If you're thinking about getting into the real estate derivatives trades, this is a session for you. Do try to stop by. Make sure you contact me if you do.