What Homeowners (and markets) are thinking

Pulsenomics recently published their semi-annual survey of homeowners. (You can order a complementary copy here ).  The 18-page feb-17_18-ao-sept-17-2016report is chock-full of surveys (using great graphics) on what people think about home ownership, willingness to buy, and (importantly for traders here) outlook on prices.   The survey participants are divided into homeowners vs. renters, AARP members  vs. Millennials, and many other ways.  In short, I’d argue that anyone looking to trade CME Case Shiller home price index futures should allocate a good block of time to work through the findings.

The only thing that’s missing is an action plan should you agree/disagree with any of the home price forecasts for the next year.  Fortunately CME calendar spreads may be the best publicly quoted market where you can express a different view.

Now, let me first caveat that the Pulsenomics survey references Zillow indices, while the CME settles on values from Case Shiller indices.  Second, there may be many reasons why survey results might differ from market-implied HPA.  That said, the CME contracts may be the best way to express an opinion on HPA for 2016.

The table above shows recent market quotes for the Feb ’17 and ’18 contracts.  This is relevant to a discussion of 2016 HPA as both Feb contracts settle on the value of the Case Shiller index for the period ending in December.  Thus, one can compare outright markets, or mid-market vs. mid-market prices to get a sense of percentage differences between the two contracts (that reference Dec ’16 and Dec ’17 values).  (A caution -indices can be revised after the initial publication).

First, note that the mid-market of Feb ’18 contracts is higher for all 11 regions than for the Feb ’17 contract.  Differences (expressed in percentage terms) range from +2.4% for WDC to +4.3% for DEN.  Note also (in a point made in the Pulsenomics report) that the percentage gains are generally much lower than the most recent 12-month change (with the exception of NYM and WDC which are coming off under-performance vs. peers).

However, rather than looking at mid- to mid-market prices, a market (the calendar spread market) also exists where instead of selling (or buying) futures in one expiration while trying to simultaneously buy (or sell) contracts for a different expiration, one can enter into trades to execute the two sides in one trade, at a defined spread.  Those price differences can be converted into percentage differences (and are shown in the columns to the right).

So, just as with outright futures, one can observe and/or enter a trade not to express a view that home price index levels will be higher in 2018 vs. 2017, but by how much.  One can also trade one calendar spread versus another, but again the DEN contract already has priced in the highest gains (i.e. 3.8% on the bid side) so one would have to consider (in this instance) how much DEN will outperform another region.

I’ve posted 1×1 markets (one lot bid vs. one lot offered) to prompt discussion.  I’d be open to facilitating larger-sized trades, and/or to providing quotes at levels inside those shown to further stimulate this conversation.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trading axes.