Using G15 (Feb ’15) contracts to frame 2014 HPA discussions

Anyone wanting to weigh in on the debate as to where home prices are headed for 2014 should have this candle bar graph in mind.  I’veFeb 15 candle taken this page from the February Recap (see Reports Section) and updated quotes through earlier today (March 5th).  The bars represent the bid-offer spread on each of the 11 Case Shiller home price index contracts quoted on the CME expressed as a percent of market price divided by spot price.  For example the 188.6 bid in the HCIG15 contract is 4.7 % above the spot 180.13 level.  The green bars represent mid-market levels.

Since the G15 contract settles on CS values for Dec 2014, and since today’s spot levels are from Dec 2013, the G15/spot ratio is a great indicator of what this market “thinks” 2014 HPA will be (for the Case Shiller indices).

G15 mid-market levels range from ~+3-9%/spot, a much tighter clustering than the 2013 results (shown below the graph).   Excess performance of the California markets is no longer priced in (in fact LAX is about the lowest 1-year forward HPA, while SFR is one of the highest).  Much of the slowdown in California prices (and LAV) can be seen by comparing the ratio of 2014 HPA (or mid/spot) vs. 2013 gains.  Those ratios range from 20-38%.  By contrast some of the areas that had been slowest last year,  have some of the highest 2014/2013 ratios (to include CHI @ 56%, NYM @89% and WDC at 62%).

So instead of a “the rich get richer” year, it appears that we’re headed for a “the last shall be first” kind of year.

Now a big qualifier is that the Feb cycle historically has less volume and wider bid/ask spreads than the preceding Nov expiration.  For example, the average bid/ask in the Nov ’14 contract is 2.8 points today, while the average for Feb ’15 is 5.4.  The open interest of Feb ’15 is 10% of that of Nov ’14.  However, given that the Feb ’15 contract lines up with year-end index valuations there’s no reason why we can’t bring (steer) more attention to the Feb ’15 contract.  Last month another trader filled out G14/G15 calendar spreads to start discussion on Feb ’15 prices.  I’d like to continue that effort.

While many Feb quotes are based on calendar spreads vs. Nov ’14, the range of values in the above graphs suggests some good opportunities for inter-city spreads within the Feb ’15 contract.  For example, it appears that quotes are consistent with the notion that SDG will outperform LAX over the next year by ~3%.  It appears that NYM will be the best of the 3 Northeast regions.  Do traders agree? If not, IC spreads are a way to express such views.  I intend to populate (and tout) some such IC quotes later in the week.

If you have any questions, or would like to see some particular IC (or calendar spread linked to G15) discussed or touted, please get in touch at johnhdolan@homepricefutures.com