Negative bias in longer-dated expirations?

I’ve been puzzled by both the lack of trading in longer-expiration contracts and the evolving level of forward prices.  The longer expiration futures allow hedges to be put in place for years -more typical of the holding period of a home – yet most trading is in the front contract.  Inventory is tight, incomes are growing (at least from the Friday unemployment report), and inflation fears seem to be rising (a concern for CS contracts denominated in nominal levels).  I’d also expect the next Pulsenomics survey to reflect HPA that are still >3% post 2017.

Yet the tables below illustrates (from page 21 of my Oct recap), quotes on longer-dated contracts have come down over the last month.  Year-on-year percentage gains (e.g. Nov ’16-’20) have collapsed to be consistent with HPAs of <3%.

While general bearishness might be one explanation for the change, I would tee up for your consideration a different set of thoughts.

As someone who gets many inquires, I understand that there may be  more hedgers than natural longs (in the short run, at this moment in the product life cycle). I appreciate the theory that suggests that hedgers might increase their utility in selling below “expected” levels.  But where are the insurance providers who, faced with sellers selling below fair value (if that’s the case) are willing to step in to take the better than even odds opportunity?  I realize that once someone enters a long forward long (or for that matter, writes a put option) that they have few hedging opportunities, but forward HPA of 2.5% seems to be well below expectations.

While I’ve shown the HCI contract (on the CUS 10-city index) the same themes hold true for other regions.  The California markets have been the ones quoted down the most in longer expirations.  I can’t say (no one can) that this is all general bearishness, but I am willing to point out that calendar spreads have contracted to low levels, and -unless people have become a lot more bearish – it only makes sense due to the thinness of markets.  A few hedgers seem to have pushed down back end levels.  I’m not sure that it makes sense.

This topic is one that deserves commentary and/or some trading reactions.  Where are either the natural longs, or those willing to step up to enter trades at below consensus values?  Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to engage in either.

Oct month-end (top) vs. Sept month-end (bottom) quotes.

calendar-from-oct