Basics – Seasonal effects -May 2013 contract (K13)

There was a good amount of new quotes, and improved quotes on Tuesday that had two net effects (and contributed toward Monday’s two trades).  On the one hand (as I explained in yesterday blog) some back-month bids resulted in higher closes.  At the same time, new offers in the front winter months (G13 and K13) resulted in some lower closes.  This combination of lower closes in the near expirations, and higher closes in the more distant contracts, extended the dual trends of greater curve steepness, and greater seasonality.

Much of the activity over the last two days seemed to focus on the May 2013 contract (the one referencing the index covering the period Jan/Feb/Mar).

The battle between the year-long upward drift in home prices versus the seasonal negative impact of generally lower home prices in the winter is playing out in the K13 (May 2013) contracts.  (Again, a reminder that the Case Shiller index used for trading, is the non-seasonally adjusted version generally referred to in most home price index discussions.)

Note that the five most northern cities (BOS, NYM, WDC, CHI and DEN) now all have mid-market prices that are no more than 98.5% of spot.  (CHI the low comes in at ~94%).

On the other hand the highest markets (as shown here as a percent of spot index) include the relative blamy areas of MIA, LAV, SDG and LAX.  It appears that colder winter weather has an impact on pricing of these contracts (mauc has it has been observed in analysis of Case Shiller historical data.

Only SFR stands out as inconsistent with this theory (although SFR winters are not warm and historical seasonal factors on the SFR index have been relatively large.)

As always, there’s two issues of accepting what’s already known (that seasonal factors exist) but then questioning “what’s already priced in”.

For those looking to play differences in seasonal performance from region to region I’d suggest looking into inter-city spread trades.  I’ve posted some for Feb, and one for May (CUSK13/SFRK13 @ 14.6/19.0) and would be happy to respond to any inquiries for others.  Please contact me if you’ve got an idea.