[NOTE: An earlier version of this article stated that the tradable version of the S&P/CS housing indexes would feature only two months of data. That is incorrect: They will feature three months of data, posted with a two month lag.]
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Welcome to a new $21 trillion asset class.
Standard and Poor's (S&P) officially launched the much-anticipated S&P/Case-Shiller Metro House Price indexes on Friday, May 19, and the Chicago Mercantile Exchange (CME) began trading futures on the new indexes on Monday morning. For the first time ever, investors are now able to trade and hedge against the value of residential real estate, opening up the $21.6 trillion U.S. housing sector.to investors for the first time ever.
The new indexes follow a "repeat sales" methodology developed by Karl Case and Robert Shiller, tracking the rise and fall of the price of the same houses sold over-and-over again. Initially, S&P will publish ten individual metropolitan area indexes and a weighted national composite index. The ten cities are Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Commuter Index, San Diego, San Francisco and Washington, D.C.
"Reliable and timely information on the U.S. housing market is extremely important, considering that, for many Americans, their home continues to be their biggest asset," says David Blitzer, managing director and chairman of the Index Committee at Standard & Poor's. "The S&P/CS Home Price Index will serve as an authoritative and readily available benchmark on the overall health of the U.S. housing market."
S&P will actually publish two index series, a "standard" series and a "tradable" series. Both series will track a three-month sample of repeat home sales. The "standard series" will report that data wiht a three-month lag, while the "tradable" series will report the data will a two-month lag, in an effort to make them more timely for investors. The tradable contract will be used to settle the index. For the August contract, for instance, the contract will settle based on the price of the index as of the end of June. S&P says that index values will likely be revised after the initial settlement date as more data rolls in, but that won't matter for investors: The initial settlement will be the final word for the futures contracts. Revisions will be for informational purposes only.
Contracts will be available on a February quarterly cycle, meaning that they will settle in February, May, August and November, to reflect prices for the three-month periods ending in December, March, June and September.
The futures should be a huge hit, as they will appeal to a wide range of investors, from individuals looking to play the market to large institutions looking to hedge their exposure to mortgage securities. As mentioned in myearlier article, it is easy to imagine a market for home price insurance developing, and even to imagine banks requiring people to purchase such insurance prior to granting a mortgage. After all, you have to insure your home against property damage. Why not against property value?
How Have They Performed?
Below, courtesy of Orange Country Register real estate reporter Jonathan Lanser, is a look at the performance of the various city and nationwide indexes since 1987 (the last date for which S&P/CS has data). Notice that, while real estate has done well, it has actually lagged the S&P 500 (and that's without dividends).
|
|
One year |
5 years |
10 years |
Since '87 |
|
San Francisco |
13.5% |
63.8% |
224.8% |
360.9% |
|
San Diego |
5.9% |
110.5% |
246.8% |
352.7% |
|
LA/OC |
21.2% |
139.8% |
262.3% |
348.2% |
|
Miami |
30.9% |
143.9% |
207.3% |
292.7% |
|
Washington, DC |
18.7% |
119.8% |
180.9% |
286.4% |
|
Las Vegas |
11.2% |
119.0% |
159.2% |
247.3% |
|
Chicago |
9.5% |
51.3% |
95.7% |
206.2% |
|
N.Y. City Area |
13.2% |
88.0% |
169.4% |
184.7% |
|
Denver |
3.8% |
19.8% |
92.6% |
173.8% |
|
Boston |
2.6% |
51.4% |
154.0% |
154.4% |
|
10-city composite |
14.8% |
93.8% |
190.0% |
253.5% |
|
S&P 500 stock index |
8.4% |
-6.3% |
101.3% |
367.2% |
