The Turn

With the turn in most home price indices, CME Case-Shiller futures have turned higher -particularly in the front contracts.

The graph below shows the value of each of the 11 CS indices as a percent of the most recent spot index.  Values to the left of July 2012 are the historical CS index indices, while values to the right are those for the mid-market of the CME futures.  (The black square is the spot price divided by the spot price or 100% for each index).

Note that the turn began in earnest with the June CS release.  The July index saw month-on-month increases of as large as 3.9% (for SFR) and the August contract values center around another ~2% increase (for CUS).  Nov 2012 mid-market prices are 4-5% above spot.

Much of the “pop” in futures prices occurs in contracts that expire over the next 6 months.  After that, both calendar spreads and mid-to-mid market prices suggest modest ongoing home price gains.  As such, the rally in nearby contracts is consistent with many research reports that price rises are potentially a function limited inventory, a change in sentiment, and some investor money entering distressed markets. The back contract prices suggest that this price surge is due to such short-term factors and does not represent a return to 4-5% annual home price increases.

With the abrupt change in prices on the front end of the futures curves, bid-ask spreads have widened and trading volume has declined.  (July saw 10 contracts traded versus 83 in May -the largest in a few years).  I would expect that the CS indices need to settle down, and we need to get past Labor Day, before bid-ask spreads tighten up to prior levels.

One additional observation is that while the short-term price histories of the CS indices are quite varied (since Nov 2009), the futures contract prices seem to move in unison.   This high degree of correlation seems to be at odds with the notion that different parts of the country will rebound at very different rates.  I would suggest that the combination of wide outright bid-ask spreads, and the high degree of correlation in futures prices, makes this a ripe environment for inter-city trading.  (After all a trader may disagree that CHI, for example, will be +10% (over spot) by Nov. 2013, but that trader may have very strong views on  CHI vs the CUS index, or other cities.)  I hope to blog on inter-city axes (and am willing to tout any inquiries I receive) in a later blog.