Higher Forward Prices, but Forward Prices Remain Flat (and could go lower)

As I listen to the debate about the direction of home prices over the next year, I think people get confused between those who call for a higher level of forward prices (a possibly bullish signal), versus those highlighting reductions in, or dampening of, expectations (so a negative signal).   The confusion stems from the notion that both can be right.

The graph below shows the closes to HCI contract (the CUS 10-city index) for Nov ’16.  Friday’s close of 209.6 is >16% above today’s spot Case Shiller index (of 180.13).  The market is, and has been for quite some time, pricing in >5% HPA (so make those bullish bets and hedge here).

On the other hand, the prices for the CUSX16 contract have been flat to slightly lower since the run-up ended in July (this despite the increase in the reference index from 169.47 to 180.13 during this period).  In effect, the market adjusted to higher forward price expectations 8 months ago, and has seen no reason to move higher still.  In theory, an increase in negative sentiment (let’s see what tomorrow’s #’s bring) could lower Nov ’16 prices but still leave them well above spot levels.  Contract prices would still be consistent with higher index levels over the next 2+ years – just the implied rate of HPA growth would be lower.

When you get past the bearish headlines, most bears only seem to be talking about declines in HPA but there are some (see Pulsenomics survey) calling for outright lower home prices.  If you hear of any  outright bears (i.e. willing to bet that index levels will be lower 1-2  years from now) please make them aware that they can (financially) express those views here, at premiums to spot index levels, across all ten regional contracts.

CUSx16 graphFeel free to have any bears (or bulls) contact me at johnhdolan@homepricefutures.com and I’ll be happy to walk them through trading mechanics.