2018-Year end Case Shiller values/ See Feb ’19 (G19) CME contracts

The CME Case Shiller home price index futures provide a potentially useful platform for hosting the debate of “how much will home prices rise in 2018”.  That’s because the Feb ’19 contract settles on the Case Shiller index values announced that month, which are the December 2018 values with the (Case Shiller index methodology) lag of 2 months.  Since the contracts cash settle, contracts prices should converge to expectations about those year-end index values.

Note prices can deviate from expectations before settlement for a variety of reasons, with an imbalance of orders, or thinness of market, being two likely reasons.  That said, someone who has a strong view about 2018 home price changes might be able to employ these contracts to take a position on either the Case Shiller 10-city index, or any of the ten regional components.

The graph below shows the bids, offers, and mid-market values for the 11 contracts converted into percent differences versus the respective Case Shiller Dec 2017 index values.  For example, the BOSG19 (Feb ’19) contract was bid 216.6 and offered at 219.4, versus the Dec 2017 value of 204.73.   The bid is 5.8% higher, and the offer is 7.2% above the Dec ’17 index values.  The size of the bar represents the bid/ask spread (in percentage terms), while the height of the bar represents which areas are priced at levels consistent with above-average performance (e.g. LAV and SFR) or below-average performance (e.g. CHI, NYM and WDC).

The table below the graph shows mid-market pricing (bid+ask/2), HPA gains in 2017, and the ratio of 2018 pricing versus 2017 gains.  Note that even though LAV and SFR are priced to have the highest gains for 2018, the implied HPA is lower than 2017.  Similarly, while CHI and WDC are priced at levels consistent with lower than average gains for 2018, that those gains are higher than last year.  Net, regional prices (at least as represented by CME prices) are converging…slightly.

While this chart, and trading in these contracts, may be useful, the big qualifier is that there is no open interest in any of the Feb ’19 contracts (and not much trading in the other expirations).  I’m eager to facilitate any retail-sized inquiries on these contracts to foster debate on the question posed above (i.e. where are home prices headed in 2018?).   Any prognosticators with outlier views (bullish, or bearish) might consider steering their readers here as I can’t think of a better pure play on home price expectations.

Finally, I’d note that while contracts can be traded on an outright basis, the CME allows trading in intercity spreads (a form of relative value trading).  That is, one can, for example, go long NYM and short WDC (or any other permutation) simultaneously at a pre-determined spread.  (See Oct 7, 2017 blog –UBS Outlook- Using Calls, Intercity spreads to express views, or Feb 6, 2013 blog – Intercity Spreads -How to read them, for examples/explanations.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have questions on this post, or any aspect of hedging home price indices.

Thanks,  John


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