2010: Projections vs Market Prices

With the expiration of the August contract (the June Case-Shiller data) we are now half way through 2010 and can begin to turn attention the to Feb  2011 contracts.  (Most of the time the front two contracts and the Nov cycle are where 90+% of the live quotes are.)

The thing that makes the Feb ’11 contract interesting is that it settles on the December Case-Shiller data.  As such expectations for year-on-year, or 2010 home price moves, can be tallied by a simple comparison of the Feb. 2010 Case-Shiller release and the CME contract values for the Feb. 2011 contract.

As the graph above shows, the Case-Shiller index for the 10-city index improved 1.8% through June, since the release, in February, of the December 2009 data.   Prices for the bids (squares) and offers (diamonds) for the Nov ’10 and Feb ’11 contracts are shown, with lines interpolating prices between those points and the most recent index values. 

As quotes in the Feb ’11 contract only begun to show after Aug ’10 rolled off, today’s  bid-asked spread is wide at 8.4 points.  Trading may remain challenging as we go through a period where the CS spot index has benefitted from the housing credit program, while sentiment has turned negative.  (See 8/31 blog).

Nevertheless the bid-asked spread translates into expectations of 2010 home price performance of -2.9% to +2.4%.   This lower bound is important as the recent MacroMarkets survey has economists calling for a decline of, on average, 2.08%.  (Contact MacroMarkets to register for their survey results  http://www.macromarkets.com/).   As there tends to be a reasonable distribution in those esitmates I would imagine that many are expecting declines of more than -2.9% (as implied by the 15300 bid for the Feb ’11 contract).

Stay tuned.  It’s a long way to February.

(While I am illustrating the CUS index and CME contracts, the same analysis can be applied to each of the 10 indices where CME contracts are traded.  Look for city-specific discussions in future blogs.)