While sometimes it seems that traders wait for the front contract to have weeks to expiration before showing tighter quotes, trading this cycle looks to be different -and better. Thanks to broader participation, widths of bid/ask spreads for the front contracts are inside those posted even the day before the Feb contract matured. Not only are quotes tight, but the correlated expectations that dominated spot-versus-front contract prices across the regions, during the past summer is history.
I normally save this table for the run-up to contract expirations. Given recent activity, it’s worth reviewing even with 2+ months to the Case Shiller release data that will be used to settle the March contract.
The table shows selected historical Case Shiller indices, and the recent CME bid, ask, and mid-market levels for all 11 March 2013 contracts. The table also highlights the percent change between the mid-market price and Case Shiller indices from one year before expiration, and the spot index.
Bid/ask spreads are <= 1.0 point on 6 of the contracts. I am aware of trades within the last few weeks in all 6 regions (w/ the exception of BOS), thereby giving further credence to the notion that tight spreads lead to trades, and that trades lead to tight spreads. Only LAV and LAX (two of the contracts with the largest increase versus spot) are quoted wider than 3 point bid/ask spreads.
As big a story is the patchwork of percent returns (both 3-month and one-year) implied by mid-market quotes. The regional diversification that is the hallmark of real estate brokers (“location, location, location) and the foundation for rating agency diversification models, is kicking in (just as volume in new RMBS deals is growing).
March mid-market prices are consistent with one-year returns that range from -2.25%(NYM) to +17.85% (LAV). Mid-market quotes for March are consistent with four regions showing negative 3-month returns, while 6 are up. That the CUS10 index quote suggest that overall prices will be about unchanged, hides the real story.
While traders are free (and encouraged) to express outright views, I continue to believe that (and am starting to see more use of) spread trades (both inter-city and calendar) as a way to reduce risk. The pronounced seasonality in the March-June contracts has given rise to some sharp projected increases during the spring (even in contracts currently under pressure.)
As always, please feel free to contact me (email@example.com) if you’d care to discuss any aspect of this blog or trading in housing derivatives.
I would add that, to the extent I can, I will try to tweet trades (@HomePriceFuture) when I see them (but since the contracts are open 21 hours/day I may miss a few). I would also encourage interested parties to join a relatively new LinkedIn group “CME Case Shiller Home Price Futures” if they’d care to chat with others interested in these markets.