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Index Revision, House Price Risk, and the Market for House Price Derivatives

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Abstract

It is widely recognized that options and futures markets for housing can reduce and manage the risks inherent in consumers’ large investments in housing equity. The integrity of such markets depends, however, upon the use of transparent and replicable benchmarks for house prices and settlement values. In the USA, a series of state and metropolitan indexes have been produced by a government agency (the US Office of Housing Enterprise Oversight, OFHEO), and they have been widely disseminated for over a decade. By construction, the entire historical path of each of these indexes is, in principle, subject to revision quarterly, that is, every time the index is recalculated and data are published. This paper provides the first analysis of the magnitude and bias of these revisions, and it analyzes their systematic effects on the settlement prices in housing options markets. The paper considers the implications of these magnitudes for the development of risk-reducing futures markets.

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Notes

  1. OFHEO releases a new series of historical housing prices for each covered MSA quarterly. At the time a newly estimated series is released on the OFHEO website, the previous series is removed from public view. Andrew Leventis of OFHEO was able to obtain and transmit to us the complete historical file of house price estimates released in 2001Q1 for comparison with the most current historical series released, estimating house price series as of 2007Q1.

  2. Indeed, the method of incorporating new information into the CMHPI and the OFHEO Index was changed as a result of the Butler, et al, study.

  3. It should also be noted that no information at all is available for indexes produced by private firms. For example, little information (and no historical information) is available about the properties of the Fiserv CSW indexes used by the CME in its pilot program. In contrast, detailed data on the procedures and estimation methods underlying the OFHEO price series are available on the agency’s website.

  4. For example, the name of the Denver, CO MSA (code number 2080 in 2001) was changed to the Denver-Aurora, CO MSA (code number 19740 in 2007). Presumably, this change reflects the addition of Aurora County to the MSA which had previously included only Denver County.

  5. For example, when the San Francisco, CA and Oakland, CA MSAs (code numbers 7360 and 5775, respectively, in 2001) became the San Francisco-San Mateo-Redwood City, CA MSA and the Oakland-Fremont-Hayward, CA in 2007 (code numbers 41884 and 36084, respectively).

  6. For example, the Bridgeport CT MSA and the Stamford-Norwalk, CT MSA (code numbers 1160 and 8040, respectively in 2001) became the Bridgeport-Stamford-Norwalk CT MSA in 2007 (code number 14860). Similarly, the Manchester, NH MSA and the Nashua, NH MSA in 2001 (code numbers 4760 and 5350 respectively) were merged into the Manchester-Nashua, NH MSA in 2007 (code number 31700).

  7. Data prior to 1980 are too sparse to support estimation of the fixed time effects.

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Authors and Affiliations

  1. University of Southern California, Los Angeles, CA, USA

    Yongheng Deng

  2. University of California, Berkeley, CA, USA

    John M. Quigley

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  1. Yongheng Deng
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  2. John M. Quigley
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Correspondence to Yongheng Deng.

Additional information

Earlier versions of this paper were presented at the Cambridge-UNC Symposium on Risk Management, Cascais, Portugal, June 2007, at the USC Lusk Center Research Seminar in September 2007, at the ASSA Meetings in New Orleans in January 2008, and at the UC Irvine Symposium on Urban Research, Laguna Beach, CA February 2008. The paper benefited from the comments of Richard Buttimer, David Feldman, and Audrey Pavlov. We are grateful to Andrew Leventis for providing us with previous releases of the OFHEO price indexes from the agency’s archives and to Peng Fei and Minye Zhang for expert research assistance.

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Deng, Y., Quigley, J.M. Index Revision, House Price Risk, and the Market for House Price Derivatives. J Real Estate Finance Econ 37, 191–209 (2008). https://doi.org/10.1007/s11146-008-9113-7

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