real estate derivatives - nyuw4.stern.nyu.edu/salomon/docs/shiller_nyu2007.pdf · san diego 237.16...
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14 Main Street ● Madison ● NJ 07940 ● 973.889.1973 ● www.MacroMarkets.com
Robert J. ShillerChief Economist, MacroMarkets LLC
Professor of Economics, Cowles Foundation Yale UniversityProfessor of Finance, School of Management, Yale University
Real Estate DerivativesReal Estate Derivatives
May 18, 2007
“Derivatives 2007” NYU Stern School
Until very recently…
Direct investment/hedging limited to buying/selling houses
• Transaction friction & constraints• Limited Liquidity• Costly and Slow• Impossible to short• Difficult to diversify
U.S. Housing:U.S. Housing:An Incomplete MarketAn Incomplete Market
SizingSizing--Up Housing as a Financial MarketUp Housing as a Financial Market
ScaleScale
ConditionsConditions
Reliable Price MeasurementReliable Price Measurement
Emerging ProductsEmerging Products
StakeholdersStakeholders
$22.8 Trillion$22.8 Trillion
Market ScaleMarket ScaleThe United States at nightThe United States at night
Unique Performance:Unique Performance:US Housing vs. Other AssetsUS Housing vs. Other Assets (Quarterly, 2006)
0.585.57%410.30%-0.21S&P 500
0.216.48%75.75%0.14NARIET Price Index
0.517.65%514.16%0.24GSCI Total Return Index
1.282.55%289.75%-0.30JP Morgan Gov’t Bond Index
1.051.45%202.60%1.00S&P/CSI
SharpeVolatilityReturnCorrelation20 YEAR
0.325.69%81.43%-0.11S&P 500
0.396.52%94.42%0.17NARIET Price Index
0.358.69%59.86%0.55GSCI Total Return Index
1.032.48%84.94%-0.18JP Morgan Gov’t Bond Index
2.201.29%129.42%1.00S&P/CSI
SharpeVolatilityReturnCorrelation10 YEAR
2.473.61%11.09%N/AS&P 500
2.294.80%22.73%N/ANARIET Price Index
-0.447.79%-15.10%N/AGSCI Total Return Index
0.431.69%6.01%N/AJP Morgan Gov’t Bond Index
0.410.59%-0.54%N/AS&P/CSI
SharpeVolatilityReturnCorrelation1 YEAR
0
20
40
60
80
100
120
140
160
180
200
1880 1900 1920 1940 1960 1980 2000 2020
Ind
ex o
r In
tere
st R
ate
0
100
200
300
400
500
600
700
800
900
1000
Po
pul
atio
n in
Millio
ns
H om e Pr ic es
B u ild ing Costs
Popu la t ion
In te rest Ra tes
U.S. Housing:U.S. Housing:Historical Perspective Historical Perspective (1890 (1890 -- 2005)2005)
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S&P/Case-Shiller Composite (10-City) Home Price Index Jan 1987-Feb 2007
0
50
100
150
200
250
February1982
November1984
August1987
May 1990 January1993
October1995
July 1998 April 2001 January2004
October2006
July 2009
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S&P/Case-Shiller 12-Mo. Growth Rate of Home Prices Jan 1988 to Feb 2007
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
November 1984 August 1987 May 1990 January 1993 October 1995 July 1998 April 2001 January 2004 October 2006 July 2009
Peak July 2004: 20.5%
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NAHB Traffic of Prospective Buyers and S&P CSI Composite Home Price Increase
0
10
20
30
40
50
60
70
1980 1985 1990 1995 2000 2005 2010
NA
HB
Tra
ffic
Inde
x
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Ann
ualiz
ed M
onth
ly In
crea
se o
f Hom
e Pr
ices
(%)
Home Price Increase
Traffic of Prospective Home Buyers
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Boston: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence Index
0
20
40
60
80
100
120
140
160
180
200
1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
Price
Rent
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Chicago: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence
Chicago Homes
0
20
40
60
80
100
120
140
160
180
1975 1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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Denver: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence Index
Denver Homes
0
20
40
60
80
100
120
140
160
1975 1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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Las Vegas: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence
Las Vegas Homes
0
50
100
150
200
250
1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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Los Angeles: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence
Los Angeles Homes
0
50
100
150
200
250
300
1975 1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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Miami: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence Index
Miami Homes
0
50
100
150
200
250
300
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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New York: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence Index
New York Homes
0
50
100
150
200
250
1975 1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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San Diego: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence Index
San Diego Homes
0
50
100
150
200
250
300
1975 1980 1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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San Francisco: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence Index
San Francisco Homes
0
50
100
150
200
250
1975 1980 1985 1990 1995 2000 2005 2010Date
Rea
l Ind
ex PriceRent
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Washington DC: S&P/Case-Shiller Home Price Index And BLS Rent of Primary Residence Index
Washington DC Homes
0
50
100
150
200
250
300
1985 1990 1995 2000 2005 2010
Date
Rea
l Ind
ex
PriceRent
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Residential Investment/GDP (%)1929-2006Real Home Price Index 1929-2006
0
1
2
3
4
5
6
7
8
1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
50
100
150
200
250
Real Home Price Index
Res. Invest. As Share of GDP
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Compare OFHEO Indices – Short Sample Ending 2006-IV
200
205
210
215
220
225
230
235
240
245
250
2005 2006 2006 2007 2007
OFHEO USA
OFHEO Purchase Only SA
OFHEO Purchase Only NSA
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Recent NAR Median Home Price (Ending Feb 2007)
$190,000
$195,000
$200,000
$205,000
$210,000
$215,000
$220,000
$225,000
$230,000
$235,000
2003.5 2004 2004.5 2005 2005.5 2006 2006.5 2007 2007.5
• Mounting Supply, Cancellation Rates• Diminishing Sales• Tightening Loan Underwriting• Subsiding Speculation• Uncertain Price Appreciation•Changing Psychology
"The adverse publicity surrounding the sub-prime market has further damaged home buyers' psychology"
- Hovnanian Enterprises, May 4, 2007
Market ConditionsMarket Conditions
S&P / Case-Shiller® Home Price Indices
Reliable Price MeasurementReliable Price Measurement
Emerging Products:Emerging Products:CME Housing Futures & OptionsCME Housing Futures & Options
“Financial Engineering comes to real estate at last, and the housing market will never be the same.” -Barron’s 5.15.06
** Futures Prices as of May 4, 2007* Released April 24, 2007
-4.79%-3.61%-2.06%-0.70%220.90Composite-10
-5.15%-3.97%-1.95%-0.61%238.05Washington, DC
-4.17%-3.12%-1.32%-0.46%211.77San Francisco
-5.32%-3.88%-2.10%-0.74%237.16San Diego
-4.12%-3.27%-1.08%-0.04%211.50New York
-4.66%-3.73%-1.59%-0.51%279.42Miami
-4.29%-3.09%-2.11%-0.54%268.67Los Angeles
-5.50%-3.85%-2.28%-0.63%230.52Las Vegas
-4.64%-3.60%-2.71%-1.08%135.86Denver
-3.16%-2.09%-1.25%-0.54%167.54Chicago
-4.90%-3.83%-1.81%-0.62%168.28Boston
Feb 2008Nov 2007Aug 2007May 2007February 2007*
Implied Premium/Discount in Futures Market
Emerging Products:Emerging Products:CME Housing Futures & OptionsCME Housing Futures & Options
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CME Futures Discounts July 2006-Feb 2007
S&P/Case-Shiller Indexes - February 2007 Futures Prices v. Index Levels
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%7/3/2006 8/3/2006 9/3/2006 10/3/2006 11/3/2006 12/3/2006 1/3/2007 2/3/2007
Boston Chicago Denver Las Vegas Los Angeles Miami New York San Diego San Fran Wash DC Comp-10
S&P/ C ase - Shille r C om posite - 10 : Expected C hange W ithin O ne Year, by Trad ing Day:
Throug h M ay 4 , 2 0 0 7
200
210
220
230
240
250
260
M ay2 0 0 6
Jun2 0 0 6
Jul2 0 0 6
Aug2 0 0 6
Sep2 0 0 6
Oct2 0 0 6
Oct2 0 0 6
Nov2 0 0 6
Dec2 0 0 6
Jan2 0 0 7
Feb2 0 0 7
M ar2 0 0 7
Apr2 0 0 7
*Data derived from the asking price o f the long-dated CM E futures contract and prevailing S&P/Case-Shiller Home Price Incex level on each trading day.
CM E Com posite-10 FuturesS&P/ CSI Com posite-10 Index
Emerging Products:Emerging Products:CME Housing Futures & OptionsCME Housing Futures & Options
Pay:S&P/CSI Return
Receive:Negotiated Interest Rate x % Pay:
Negotiated Interest Rate
Receive:S&P/CSI Return
Party CounterpartyOTC Swaps
Emerging ProductsEmerging Products
- Hedge Housing Exposure / Bearish Housing View - Gain Housing Exposure / Bullish Housing View
• Futures & Options
• Forwards
• Swaps
• Index-Linked Notes
• Exchange-Traded Securities
• New Mortgage Contracts
• New Insurance Contracts
Emerging ProductsEmerging Products
Banks LongsLongs ShortsShorts
Dealers
StakeholdersStakeholders
Developers and Home Builders
Hedge Funds
Individual Investors
Pension Funds
Mutual Funds
Insurance Companies
REITs
Banks
Dealers
Developers and Home Builders
GSFs
Hedge Funds
Individual Investors
Mortgage Insurance Companies
Mortgage Lenders / Originators
REITs
Stakeholders will more closely monitor, reStakeholders will more closely monitor, re--evaluate housing evaluate housing stakes based upon the “news of the day”stakes based upon the “news of the day”
• Building permits• Consumer confidence• Federal Reserve Board policy• Home Sales - new and existing• Housing starts• Inflation• Interest rates• Job creation/unemployment
• Mortgage applications• NAHB Housing Market Index• NAR Pending Sales• Housing-related company news
(home builders, raw materials, construction equipment, etc.)
• Regional economic differences• Sales/inventory ratios• Tax laws
StakeholdersStakeholders
March 27 (Bloomberg) -- The U.S. currency weakened as a private survey showed the price of homes in 20 U.S. metropolitan areas fell in January for the first time in at least six years and a Federal Reserve report showed a regional decline in manufacturing this month.
March 28 (Bloomberg) -- Asian stocks dropped for a second day, led by companies that sell to the U.S. after consumer confidence and home prices declined in the region's largest export market.
“Automakers and technology companies rely on sales in North America so the current uncertainty over the U.S. economy is pushing the shares lower,” said Junichi Misawa, who oversees $655 million at STB Asset Management Co. in Tokyo. In Japan, the Nikkei 225 Stock Average fell 0.6 percent, erasing gains of as much as 0.5 percent, while the broader Topix index slid 0.7 percent. All other markets fell, apart from in China. India's Sensitive Index slid 1.8 percent, the most in the region.
U.S. stocks posted their steepest losses in two weeks as economic reports added to concern a housing crisis will dent growth.
StakeholdersStakeholders
U.S. Housing
Creating Efficiency
• Price discovery in derivatives markets will have a positive effect on the cash market
• Greater efficiency in the cash market will reduce the impact of the real estate cycle on the overall business cycle
• Property derivatives will broaden investor base and add significant liquidity to the asset class
Concluding ThoughtsConcluding Thoughts