The attached graph highlights three key themes related to pricing of CME Case Shiller (home price index) CUS (10-city) futures during 2012. Note that the black graph is the historical Case Shiller index*100, while the red, blue and green lines are the mid-market quotes for the CME futures at month-end for Dec ’11, June 12, and Dec ’12. The brown square is the Dec ’11 index value (released in Feb ’12). The right axis represent percent price changes from the Dec ’11 index value.
First, prices for forward contracts rose steadily throughout the year. In contrasting the three mid-market price graphs, most of the rise happened in the second half of the year. (Note that the longest contract (Nov ’17) was only introduced in Nov 2012).
Second, the slope of the curves steepened in the second half of the year. The change is consistent with HPA (home price appreciation) changing from about ~3 to ~4 %. (4.16% from Dec ’11 to Dec ’17)
Third, the Dec ’12 contract prices exhibit more seasonality than the June and Dec ’11 curves. (Again, in making comparisons note that the Aug ’13, Feb ’15 and May ’15 contracts were introduced in 2012. Graphs for the Dec ’11 and June ’12 curves were the results of interpolations between then existing contract prices. Similarly, the Dec ’12 curve shows fewer seasonalality beyond Nov ’15, as the only longer contracts expire in November).
A set of graphs for all 11 contracts is in the Reports section or one can click here.
I would qualify all the graphs by noting that most markets are 1-lot x 1-lot, that the bid/ask spreads (particurlarly on the longer contracts) may be wide, and that for some of the regional markets, the last time there was a full set of bids and offers (prior to year-end) was during the early fall.
That said, the CUS (10-city) market has been fairly tight, has seen some trades, and has remained near fully populated throughout the year. As such, I think that one should be more comfortable drawing conclusions on what forward prices might suggest.
For example, the mid points of the Feb ’13 contract (157.0),and Feb ’14 contracts (162.9) are about~5.0% and ~8.9% above the 149.59 index level from Dec. 2011. Those levels are consistent with the modest levels of home price appreciation that many Wall Street reserach firms have suggested. Prices on longer-dated contracts are consistent with continued modest home price appreciation through 2017.
I think that understanding, and buying into, the CUS curve prices is key as it opens up discussions (and trades?!?) about other possible trades. One might use the CUS curve as a starting point for relative value on other contracts either as to outright levels, implied HPA (via calendar spreads) and inter-city spread quotes.
Feel free to contact me (firstname.lastname@example.org) if you’d care to discuss these graphs, the CUS prices, or any trades relative to the CUS markets.
Happy New Year!