What Parcl Traders Need to Know
- Residential real estate prices have broadly risen month to date (MTD) in April, though some markets - such as Miami Beach, Los Angeles, Chicago, Boston, and Philadelphia - have risen at a more significant pace. Interestingly, the Los Angeles market reached an all time high in median price per square foot just this week.
- San Francisco, Portland, and Denver have lagged; all are down MTD.
- Volatility across markets has generally receded following a recent spike around bank solvency concerns.
- The spread between 30 year mortgage rates and the 10 year U.S. Treasury yield remains historically wide, However. Should this spread mean revert, it could perhaps create an additional tailwind for residential real estate demand near term.
- Parcl traders have responded accordingly; six of seven Parcl markets skew long, with only San Francisco (+5.5% YTD) skewed short.
The state of real time real estate prices
Residential real estate prices have broadly risen month to date (MTD) in April, with the 16 markets covered in this update up 1.5% MTD, on average.
Some markets - such as Miami Beach (+5.7% MTD, +12.1% YTD, down 2.6% from peak), Los Angeles (+4.5%, +9.6%, all time high), Chicago (+3.4%, +9.3%, -5.7%), and Boston (+2.8%, +12.3%, -2.5%) - have risen at a more significant pace. Laggards are San Francisco (-0.6%, +5.2%, -8.5%), Portland (-2.9%, -4.0%, -12.5%), and Denver (-1.4%, +0.7%, -11.4%); all are down MTD.
This is a continuation of the trend of regional divergence that has persisted for much of the past ~12 months, at all levels of geography (national regions, state vs. state, intra-metro, etc.)
Interestingly, the Los Angeles market reached an all time high in median price per square foot just this week. Even top performers Miami and Miami Beach have not broken through the all time highs those markets set within the last ~six months.
Miami and Boston continue to screen as top performers on a risk-adjusted basis. Portland, Denver, and San Francisco screen as the worst performers.
What factors are driving markets generally?
Volatility across markets has generally receded following a recent spike around bank solvency concerns as evidenced by the VIX Index and St. Louis Fed Financial Stress Index (shown below). This has led to a stabilization in risk appetite, though both treasury yields and equity markets are approximately flat MTD.
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On the other hand treasury yields continue to exhibit elevated realized volatility, which has an impact on myriad downstream elements, such as mortgage rates and demand for housing. Phoenix and Las Vegas are two regional real estate markets that exhibit among the highest negative correlations to real time changes in interest rates.
The spread between 30 year mortgage rates and the 10 year U.S. Treasury yield remains historically wide. Should this spread mean revert somewhat, and the 10y Treasury remains unchanged or continues to decline, this could perhaps create an additional tailwind for residential real estate demand near term.
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The Case Shiller is set to update for February data next week, which will likely bring residential real estate prices and volatility back into focus. We expect the Case Shiller to show a bottoming taking place across most residential real estate markets; real time data from Parcl Labs picked this up as it was happening and now shows a strong recovery with many markets up low/mid single digit percent off their YTD lows.
What are Parcl traders doing?
Parcl traders appear to be attempting to capitalize on the recent broad recovery in real estate prices; six of seven Parcl markets currently skew long. The only market that skews short is San Francisco. Assuming financial conditions remain relatively accommodative, we should expect to see a continued bullish tilt across Parcl markets, though this may create opportunities for traders to open contrarian positions, especially in regional markets with weaker relative fundamental trends. This could be particularly attractive to traders that have a contrarian or market neutral view on Parcl markets with funding rate arbitrage opportunities.
