One graph to cover many aspects of trading in CME Case Shiller futures

The attached graph may be a useful tool for illustrating both absolute and relative value differences in the prices quoted in the 11 different regional Case Shiller (home price index) contracts traded on the CME.  I’ve (somewhat arbitrarily) divided the regions into five cold areas (BOS, CHI, DEN, NYM and WDC, to the left), and five warm areas (LAV, LAX, MIA, SDG and SFR to the right), and the 10-city CUS index in the middle.

Each region shows prices (expressed as a percent of spot values) for each of the five November expirations (Nov 2013-2017) in a bar-diagram format.  The bottom, middle, and top of each bar represents the bid, mid, and ask level for each contract.  The height of each bar reflects the size of the bid-ask spread for that contract.

Note that the graph shows how, at this moment in time, all contracts are pricing in increasing values of the Case Shiller index over the next four years.  (Recall that contracts settle on the value of the index released in the month of expiration, so futures prices and index values should converge.)  Bids for the Nov ’17 contracts (so not even mid-points) range from 13.6% above spot levels for DEN, to 24.6% above for LAV.

Note that I’m only showing the (relatively more liquid) November expirations to avoid seasonality issues. Other expirations may show seasonal dips in prices.

In general, prices in the warm states reflect more bullishness than prices of the cold states.  It’s open to debate whether that relative bullishness is reflective of expected population flows, changes in local economies, foreclosure remediation processes, or just that some of the hardest hit areas (e.g. LAV, MIA) are bouncing back faster.

The warmer states generally tend to have narrower bid-ask spreads (expressed here in percentage terms)  Again, that debate might center around local trading interest, lower index value volatility, or other differences in perceived risk.

The CUS and NMM contracts stand out (today) as having relatively narrow bid-ask spreads.  The Relative tightness of these spreads may present an opportunity via inter-city spreads for relative value discussions and trades.

Feel free to fire away with any questions related to this graph, or any other aspect of hedging home price indices at johnhdolan@homepricefutures.com