Housing Indexes Golden?

September 20, 2006

S&P announces agreement with Goldman Sachs to develop an array of financial products based on the S&P/ Case-Shiller indexes.

Standard & Poor's announced a licensing agreement with Goldman Sachs for the development of financial products based on the S&P/ Case-Shiller Home Price Indices, their widely-publicized measure of U.S. home prices in the United States. 

The deal should allow Goldman to leverage its securities expertise and experience in real estate investment while making use of some of the most respected housing data available.  While the products may come too late to allow investors to hedge against today's softening real estate market, they should ultimately provide investors with both valuable investment vehicles and hedging tools.

Dan Sparks, Managing Director and head of Structured Products at Goldman Sachs, said "We look forward to providing our clients, as well as the financial community, the opportunity to express trading views based directly on the size and direction of changes in U.S. home prices." 

Still, Goldman may find that some aspects of the Case-Shiller methodology may make it more difficult to provide products that reflect a real-time look at real estate markets.  The indexes fall short of being a fully comprehensive reflection of the U.S. real estate market.  In addition there sometimes seems to be a gap between the Case-Shiller index and public perception regarding the performance of the housing market.  In the recent past, we've seen the Case-Shiller indexes occasionally appear to hold strong even as 'for sale' signs proliferated and a buyer's market ensued.

The reason for this delay is that the Case-Shiller indexes are calculated using a lagging three-month moving average algorithm, so the index data point from each reporting month is based on sales from preceding months.  Also, the indexes exclude a number of real-time indicators, such as the reduced earnings estimates of home builders and the increased inventory of unsold homes on the market.  The Case-Shiller "repeat sales" methodology, which pairs sales of the same home in order to measure appreciation, also does not catch the sale of new homes in its net. Perhaps more pointedly in our current market, it does not capture the lack of sales of new homes, or the discounts and incentives builders are throwing at buyers to entice them to buy.

One way or the other, the indexes do appear to have brought increased transparency to the housing market, and the addition of serious financial players like the CME, which currently lists S&P Case-Shiller futures and now Goldman Sachs can only mean good news for investors looking to hedge or leverage their housing exposure. 


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