Quotes on the S&P Case Shiller futures contracts were generally lower after Tuesday’s release of the May indices. (Sorry for the delay but I was attending the Core Logic Real Estate symposium, where among other topics, the 300+ audience heard (twice!) about the need for the real estate market to hedge forward home prices. CME futures were specifically suggested as a template. I’m hoping for lots of questions from interested parties. More on that in a future blog.).
My sense is that it wasn’t so much that index levels didn’t rise, but they rose less than had been implied by Aug ’15 contract prices. (There were also slightly revisions to past month #’s that tempered SFR gains.) In fact there were two sales (i.e. when a bid is hit) in the SFR contract on Monday that proved to be correct. (There were no trades on Tuesday).
The “one-day price move” line (3rd from the bottom) illustrates the decline. Mid-market levels on the Nov ’15 contract fell in 9 of the 11 contracts, with BOS and LAV being the exceptions. The regions that have exhibited strong index gains (e.g DEN, MIA, and SFR), and that had priced in further strong gains in futures prices, all slipped by more than two points, despite month-on-month index gains. (My sense is that DEN and SFR both still have some of the lowest “months on inventory” ratios and that further noise in these regional indices should be expected.).
Bid/Ask spreads were unchanged for Nov ’15 (shown here), but slightly tighter in Q15 and much wider in X16 (both not shown here). With ~one month to expiration, Aug ’15 (Q15) bid/ask spreads average 1.67 points which is tighter than recent experience (e.g. the bid/ask spreads for the May ’15 contracts averaged 2.67 points as of April 30) but about normal for past expirations. We still have two days before month-end, so it’s possible spreads could be tighter still.
Feel free to contact me (firstname.lastname@example.org) if you have any questions about this blog or hedging home prices.