I continue to be a fan of the work done at Pulsenomics regarding the use of surveys to gauge sentiment related to home prices (either among forecasters, or home owners). The Pulsenomics quarterly survey is (IMHO) the best survey of forward home price expectations by those in the business of making forecasts (to include, in the interest of full disclosure, myself).
Recently, Cityscape published a detailed report where Pulsenomics founder Terry Loebs describes both the methodology in calculating the Pulsenomics Housing Confidence Survey. It is recommended reading for anyone looking for views of homeowners (and renters) toward many questions, including homeowner confidence.
The report may have particular use for those following the CME Case Shiller futures as the results are tallied for the 20 regional components of the Case Shiller 20-city index. Since ten of those indices have contracts traded on the CME, one might be able to use the survey results in their trading.
I’ve taken a first cut at comparing survey results against CME markets here. The table to the right takes a portion of the results in Exhibit 2 (using only those cities in the CUS 10-city index). (I’m only using the homeowner confidence index, but there is larger set of results that includes renter confidence. Readers are encouraged to look at the entire report and see how use of other data might impact results.)
To the Pulsenomics results I’ve added the CME trading symbols, the gain in the Case Shiller index for the last 12 months, the spot Case Shiller index levels, the bid and offer for the Aug ’16 CME contracts, and the difference between the mid-market level of the Aug ’16 contract and spot levels. (I used the Aug ’16 contract to minimize seasonal levels. Ideally, I’d like to use a longer-dated contract, consistent with longer-dated expectations, but wanted to avoid seasonal issues. In addition, many of the Aug ’16 contract prices are mine, so caution is advised as I’m evaluating my own inputs. That said, anyone who wants to narrow the Aug ’16 bid/ask spread, or to challenge the bids and offers, is encouraged to post prices. Hopefully the following results might prompt some such reactions. Also, I use the Case Shiller indices as those are the references for the CME futures. Pulsenomics tends to focus on the Zillow indices.)
I then took the Pulsenomics Homeowner Confidence Level and contrasted it versus the mid-market implied gains for the Aug ’16 CME contracts to see if confidence levels are correlated with higher home price expectations.
The scatter diagram suggests that confidence levels seem to be generally correlated with one-year forward gains. For example, CHI has both the lowest confidence level as well as CME Aug ’16 prices with the lowest implied gains, while SFR has one of the highest confidence levels and highest CME price gains.
The outliers (e.g. DEN, WDC in particular) might be worth evaluating more thoroughly. DEN does have one of the stronger improvements in confidence levels over the last year, so momentum might play a role there, but WDC has both one of the weakest trailing 12-month gains in the Case Shiller index as well as only modest 6-mon and 1-year gains in confidence levels among homeowners (as well as weak gains among renters (not shown here)).
Might WDC CME Aug ’16 prices be too low, or might confidence levels be too high? I have no strong views BUT am very happy to accommodate anyone looking to debate the topic, and/or to trade WDC (or any other) futures.
Please read the entire Citiscape report and/or feel free to contact me (firstname.lastname@example.org) if you have any questions.