I opened an account with OptionsXpress earlier in the year as means to separate my investments from my trading/speculation. I opened the account because OptionsXpress is known as a broker that caters to more saavy investors who play in the options and future markets. In a fit of arrogance, I thought that I could be one of these saavy investor. In that time, I’ve done three trades.   Saavy I’m not.  I barely have enough time to decide to where to put my “investments” in, let alone try to speculate.  That and I don’t really know what I’m doing.  The advanced tools for options traders are far beyond the level sophistication I have.

The other day, however, I was in my account poking around and decided to look at some Futures.  A Future is a standard contract that obligates a transaction in the future, hence the name.  It has three basic components - the underlying asset, price, and date. So a Pork Future for 1 Hog for Mar 19, 2008 could be priced at $50. If I sold the future at $50, I have basically agreed to sell 1 Hog at $50 on March 19th 2008 regardless of what the price of that Hog might actually be on March 19th, 2008. All else equal, futures should actually be priced higher to reflect interest (ignoring storage and insurance cost for physical commodities).  Let’s say a hog future sells for $50, and is currently priced at $50, the Hog Future should price higher than $50. Otherwise, I could borrow a hog today, sell it for $50 and then earn interest on that $50 from today’s sale, and buy the pork future to cover the risk from shorting.

I expected to see the standard equity index futures, such as the S&P 500 and Nasdaq at OptionsXpress. What I didn’t expect to see were housing futures. I had heard about housing futures, but didn’t expect that they would be available in my brokerage account to trade. There are basically 11 different housing futures that track the 11 different local markets based on the Case-Shiller Metro Area Home Price Indices, and another that tracks the composite index. These markets are:

  • CUS=Composite Index
  • BOS=Boston
  • CHI=Chicago
  • DEN=Denver
  • LAV-Las Vegas
  • LAX=Los Angeles
  • MIA=Miami
  • NYM=New York
  • SDG=San Diego
  • SFR=San Francisco
  • WDC=Washington, DC

The S&P/Case-Shiller indices are intended to measure changes in residential real estate using repeat sales pairs. The actual methodology is quite complicated.  The white paper is actually quite informative as it does not limit itself to just a discussion of the index construction but an overall discussion of the housing market.

Since I live in Boston, it was only natural for me to start off there. What I observed was that the future price was decreasing for each subsequent period. I took a quick a look at some other indexes, and each one I looked at showed the same thing, a clear downtrend.

The market that has showed the greatest downtrend is no surprise - Las Vegas. I find the view of market more credible than any statement made by National Association of Realtors who have only recently begun to acknowledge that we might be in a housing slump. The lower futures prices while not huge is another significant indicator that there still remains a great deal of pain to be felt in housing.