This is the time of year when many research teams make their forecasts for home prices (or HPA, home price appreciation) for 2015. What weight should you give those forecasts, are they corroborated by others, and what do you do if you agree (or disagree) with them?
I would argue that the CME Case Shiller futures markets for Feb ’15 and Feb ’16 expiration should provide both a good sanity check as well as the best public platform for making a pure statement on home price appreciation for 2015. Recall that the Feb ’15 contract references the Case Shiller index for the period ending Dec. 2014, while the Feb ’16 contract settles on the value of the CS index for the period ending Dec. 2015. If you believe that contract prices reflect expectations for the index value at settlement, then you might opt to derive implied changes in index levels (or HPA) from the percent differences in contract prices.* (* There may be many other reasons for quotes and price differences)
The table to the right shows both the outright Feb ’15 and Feb ’16 markets for each of the 11 regions (to the left) as well as the calendar spread markets. The bid and offer on the calendar spread markets, as well as the difference between the mid-market levels (in yellow) are converted to implied percent changes further to the right.
Those percent changes are compared vs. changes in the CS index for the last 12 months.
Finally, the last column shows the width of the bid/ask spread in the Feb ’15/Feb ’16 calendar spread markets.
Net, the implied HPAs derived from calendar spread bids and offers tend to bracket those implied by mid-/mid-market levels. Those HPA range from 3.1% (BOS) to 4.6% (MIA).
Bids and offers on calendar spread implied HPA tend to be +/- 0.5-1.0% higher or lower than implied HPA from Mid-mid markets but with some (e.g. SFR) being much tighter, while others (e.g. CHI) tend to be wider.
Tighter calendar spreads help tighten outright markets (and vice-versa) so any help on narrowing these calendar spreads would be appreciated.
My attempt in posting this table is to prompt awareness of, discussion of, and (hopefully) trading in these spreads. (BTW both LAX and SFR Feb ’15/’16 calendar spreads have traded in the last few weeks). Feel free to ask me any questions about this blog, or any aspect of home price hedging at email@example.com