The toughest time to quotes markets is when sentiment is shifting. Psychology plays a big role in that all the people who were eager to sell, faced a market with few buyers, but then when prices turn, seller disappear and buyers are looking to buy at yesterday's levels. As such, bid/ask spreads tend to widen, and price discovery becomes more difficult and yet more important.
This has been the case during April as quotes (see below) rose dramatically. (There were almost a year's worth of price moves compacted into six weeks).
Interpreting the market has been further complicated in that the California markets, i.e. those that were under the biggest pressure during the Fall of 2022, had the sharpest rebounds. The longest dated San Fran contracts were up more than 30 points from mid-March (measured using mid-markets), San Diego markets were up 40 points, while some LA contracts were up >50 points!
By contrast, the "safest" markets from year-end 2022, of Chicago and Miami, had much smaller gains.
By my tally, there were ~30 lots traded during this timeframe (across all regions), so volume remains low, and contract prices react sharply to any one trade. As typical, many of the trades were done on the front contract (the May 2023/K23 contract, not shown below) but with some trades on the Feb 2025 (G25) expiration.
Net, 2023 (has flipped from implied declines of almost 10%) to slight upticks (measured as mid-market vs 2022 year-end levels).
Some of this appears to be demand being pulled forward from 2024 (inventory shortage?), as implied gains for most Feb 2025 contracts (over Feb 2024) are barely positive.
Some of the recent activity has been a function of both calendar and inter-city spread quotes. Users can to their part to contribute to market liquidity by adding to the bid, or offer, for the HCI May 2023, Feb 2024, 2025 and 2027 contracts, as those four contracts serve as the leg of many of the calendar and inter-city spreads.
Feel free to DM me with any questions about this blog, or if you have any hedging strategies that you'd like to share, and please follow my marketing efforts on Twitter (@HomePriceHedges).
Thanks, John
