“One of these things is not like the other”

My favorite sage on life (Cookie Monster) used to be good at highlighting differences among otherwise similar things.  So it is with blatant plagiarism that I use one of his favorite expressions to illustrate an outlier situation in the CME Home Price Futures.

The bar graph to the right shows the bid/mid/ask levels for each of the 11 Case Shiller contracts quoted on the CME (as of Tues close).  Values are expressed as a percent of the spot index.  (So, for example, the BOS spot index is 161.94, the Q13 (Aug) bid is 165.0 (+1.9%), the mid is 165.6 (+2.3%) and the ask is 166.2 (+2.6%).  For 10 of the 11 contracts the mid-market is 2.0-2.8%.

Then there’s Chicago (CHI).

While my natural inclination may have been to sell CHI on spread against…..anything, I’ve learned to respect outliers.  What could make CHI different?

The implied “pop” in the CHI contact (a robust +4.5%, on top of last month’s 3.7%) may be reflective of three high tide/full moon events that underscore much of the recent strength in Case Shiller indices.

In no particular order CHI may be benefitting from:

  1. Strong fundamentals/affordability
  2. Stronger seasonal factors than other regions
  3. A sharp decrease in the percent of homes sold as distressed.

Let’s take these one at a time.

Of the four northern cities traded on the CME (BOS, CHI, NYM and WDC) Fitch lists (in a recent report “US RMBS Loan Loss Criteria”) only Chicago as “undervalued”.  (The rest are either “sustainable” or in the case of D.C. overvalued.)  Undervalued housing in the midst of a national reversal in home prices, and facing the potential for rising interest rates, may produce some core underlying  strength.

On the seasonal front, one only has to walk along Lake Shore Drive into the face of a January wind to imagine that houses just might sell better in the summer seasons.  The seasonal factors for the Case Shiller index reflect this and are much more pronounced that for other regions.

Finally, the focus in the “Rent-to-buy” strategy may have shifted from Phoenix, Las Vegas and Atlanta and turned toward CHI.   Gary Lucido did a good piece in his recent blog http://www.chicagonow.com/getting-real/2013/08/july-chicago-home-sales-highest-level-in-seven-years/  highlighting (among other things) the decline in the percent of distressed properties (as a percent of all sales) being sold (and at ever small discounts) in Chicago.  Is it possible that, among the ten CME traded regions, that the rent-to-buy program is having a disproportionate impact on CHI?

So, are CHI prices an outlier, or are CHI attributes unique enough to justify a premium against other markets?  I’m happy to facilitate either side of the debate.  Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss.