LAX Calendar spreads

The LAX market has been one with the tightest bid/ask spreads over the last few weeks.  There have been both outright trades (LAXX16) and calendar spread trades (albeit only one lots).  Today, I’ve posted (table below) stale prices on the outright and calendar spread markets so that traders can see what these prices might imply.  (I’ve only posted calendar spreads for Nov/Nov expirations.  While other one-year quotes (e.g. Feb 14/Feb 15) are quoted and useful, focusing here on only the Nov calendar spreads suffices to illustrate some key themes.)

LAX Calendar Nov 21

The table illustrates that not only have outright markets been relatively tight (to the left, both LAXX15 and LAXX16 are 1.4 points) but that some calendar spread quotes are narrow (e.g. LAXX15_X15 -11.0/-10.0 market- in green/orange).  In fact there’s a synergy effect at work here where tight outright spreads allow tighter calendar spreads and vice versa.  So, traders are encouraged to opine on (quote) either the outright or calendar spread markets.

Both the outright markets and calendar spreads can be converted into annualized percent changes (which I show in the right side of the table).  (Mid market percentage changes are from mid-market of the outright quotes.) Often (but not always) the implied percent changes for the calendar bid and ask quotes bracket the mid/mid implied percent change.  As such these calendar spread markets “may ” be useful in terms of discerning market-implied HPA (Annualized Home Price Appreciation).

Now I say “may” as there may be both many reasons traders post calendar spreads at various levels (e.g. to unwind outright positions) as well as many reasons that an index gain from year-to-year might be for some reason other than universal HPA growth across a region.  (Changes to the percent of distressed assets and the discount on the sale of distressed assets have contributed to index gyrations in the last few years).  Finally, these quotes tend to be 1×1 so depth of market is a question.

That all said, I think that the calendar spread market is useful for those looking to express a view about changes in an index level from year to year.

In addition, observing changes in calendar spreads and implied annualized percent changes “may” be useful for those looking at forward home price expectations, either outright or when comparing one region versus another.  Bids in the longer dated LAX calendar spread markets (so again to recall where one would buy the front contract versus simultaneously selling the back) have been ever less negative over the last two months, consistent with ever lower implied year-on-year % price changes.  The current annualized price changes from say Nov 2014 to Nov 2016 were in excess of 9% during the summer (if quoted at all).  Calendar spread quotes implying 3-5% annual gains imply big changes from the strong gains over the last 12-18 months.

I’d be happy to discuss this table, or calendar spreads in general, or to tout a view that anyone cares to share.  Feel free to contact me at johnhdolan@homepricefutures.com