Home prices in the U.S., as measured by the S&P Case Shiller home price indexes, rose in July over the previous month, as 18 of the 20 metropolitan areas comprising the benchmark saw saw a boost to real estate values. For the 16th consecutive month, every region saw year-over-year declines, but the pace of those declines continues to decelerate, according to the Wall Street Journal. The ten-city index is down 33.5% from its mid-2006 high, while the 20-city index has declined 32.6%.
The news released Tuesday morning was far better than investors were anticipating, as evidenced by movements of the MacroShares Major Metro Housing Up Trust (UMM) and Major Metro Housing Down Trust (DMM). In relatively heavy trading Tuesday morning, UMM had gained more than 3%, while DMM was down by about the same amount.
The paired MacroShares funds offer investors leveraged exposure to home prices through a unique exchange-traded structure. The two funds agree to pledge assets to each other over time based on the level of the S&P/Case-Shiller Composite-10 Home Price Index. Because the maturity date of the funds is November 2014, these products reflect expectations for home prices beyond the short term. Essentially, UMM and DMM reflect investor expectations on the level of the Case-Shiller Index in approximately five years.
Since their inception in June of this year, UMM has jumped by nearly 35%, while DMM is down nearly 25%. Recently, DMM was trading at a discount to its net asset value of about 17%, while UMM was trading at a 24% premium. While such large spreads would be alarming for most exchange-traded products, in this case it simply reflects investor expectations for the U.S. housing market (specifically, that home prices will continue to rise over the next five years).
Disclosure: No positions at time of writing