One-year put quotes

With all the concerns about home prices, I thought that it would be useful to start a (monthly?) effort to foster discussion on the price of buying down-side price protection on each of the 11 regions traded on the CME.

The table below shows suggested bids and offers on puts on the May ’19 (K19) Case Shiller home price index futures contracts that are quoted on the CME.  The strike levels (that are close to spot index) are highlighted in yellow.  Suggested bids and offers are shown in blue.  The percent of put premium to spot is in the far right column, to somewhat adjust for different levels of spot index.  The degree to which the strike is below the futures contract quotes will also influence these results.   (BTW – the futures prices shown are from April 19th.)

While I’ve shown strikes near spot levels, and puts on the May ’19 contracts, any 5-point strike can be quoted, for any expiration.  In addition, calls can be quoted.  Trades can be teed up electronically in the HCI (sometimes labeled CUS), CHI, LAX and NYM contracts, but the other seven contracts need to be set up off-exchange and then cleared.

Also, any permutation of underlying/option trades are possible.  I’m open to quoting straddles, strangles, bull- and bear-spreads, as well as delta-neutral volatility plays.

While these trades can all be done on the CME, I’m also open to (modest-sized) trades on any other housing index via an OTC trade.

Feel free to contact me (johnhdolan@homepricefutures.com) to discuss this blog or any aspect of hedging home price index risk.

Thanks,  John

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Mid April price updates -CME Case Shiller home price index futures

Here’s an update of quotes across the CME Case Shiller home price futures contracts from early April 16th.  I’ve posted as there’s been quite a bit of bid/ask spread compression since March 29th both by regions and across the expirations.  For example CHI bids are 6.4 points higher, while offers are 7.4 points lower, for a net improvement of 13.4 points (when aggregated across all expirations).  So, for ten Chicago expirations with two-sided markets, that works out to tighter spreads by ~1.3 points per contract.  Other regions, such as BOS, LAV and LAX also show similar spread tightening.

Four of the five mid-expiration contracts (i.e. May 2019- Nov 2020) have also seen bid/ask spreads tighten by more than 10 points (again, when tallied across expirations with two-sided markets).  For both regional and expirations, spread tightening seems to be a function more of offers falling than bids rising.

Finally, not shown in detail,  the limited amount of higher bids is concentrated in longer-dated maturities (from May 2019 on), which has had the impact of increasing slightly, the depressed implied forward HPA (annualized home price appreciation changes).

 

Feel free to contact me (johnhdolan@homepricefutures.com) to discuss this blog, or any other aspect of hedging home price indices.

Thanks,  John

Should forward HPAs converge?

I’ve compiled the following graph to pose the question, and prompt debate: should forward HPAs (i.e. annualized home price appreciation rates) converge across regions?

The graph stitches together year-on-year (YOY) price differences both between the CME Case Shiller home price index futures contracts and historical Case Shiller indices, as well as between futures contracts.  For example, mid-market values of the May 2018 contract are compared to index values released in May 2017 (and the same for Aug ’18, Nov ’18 and Feb ’19 futures prices against historical Case Shiller indices), and then mid-market values between pairs of futures contracts are compared (e.g. the mid-market value of the May ’19 contract vs. the May ’18 contract, Aug ’19 vs. Aug ’18 contract, etc.).

While recent momentum,  local wealth creation (e.g. in SFR (San Francisco) on tech stocks), and possibly inventory shortage, have pushed expected YOY gains in some regions to higher levels than average (i.e. SFR and LAV (Las Vegas)), by Nov ’19 all YOY gains converge to just above 2.0%.    (Note that the other eight regional contracts include: BOS (Boston), DEN, (Denver), CHI (Chicago), LAX (Los Angeles), MIA (Miami), NYM (New York) SDG (San Diego) and WDC (Washington DC).  The prices on the futures contracts expiring in 2019-2020 are consistent with slowdowns in HPA, but still positive gains, at about the level of income growth.  It may also be consistent with a notion I’ve had for years, that forward prices are biased to be lower than expectations, as there are (at least based on current inquires) an abundance of hedgers.

However, most of the price inputs are mine (so I can’t offer a third-party analysis of what “the market is thinking”), and YOY gains across the regions -despite different momentum and despite differences in population gains -converge to about the same low rate.

Does it seem plausible that YOY gains for 2019, at least as priced in by longer-maturity CME contracts, should have SFR/LAV (the strongest contracts for the next year) and CHI/WDC (the weakest two based on one-year forwards) converge, and to converge to only 2% HPA?

I suspect not, and if there are readers looking to debate the point, I’d be open to trading some calendar spread pairs.  (Recall that in trading calendar spreads one can simultaneously buy (or sell) one regional contract, while selling (or buying) a longer contract at a pre-determined dollar spread.)  I would think that buying one regional calendar spread, while selling another region’s spread (covering the same time periods), might be a way of expressing views on relative HPA gains.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss this blog, or any aspect of hedging home price indices.

Thanks,

John

Recap for March – CME Home Price Index Contracts posted

I’ve posted a recap of activity in the CME Case Shiller home price index futures (and options) for March in the Reports section (or you can link here).  The report contains tables of prices, price changes, graphs of historical and forward prices, and quotes on inter-city and calendar spreads.  Implied HPAs are shown for all 11 regions as well as open interest and historical volumes.

March was another quiet month (but busy in my “day job”).  Highlights from the month include:

–There were 9 futures contracts traded in March in 3 regions (HCI, CHI, and SFR) across 3 expirations.  There were no options trades.

–Activity remains slow with most bid/ask activity in the SFR contracts.

–For March, bids and offers were higher across most regions (except lower in CHI, WDC). Bid/ask spreads were flat across expirations.

–New front contract (K18) bid/ask spreads are wider than typical, given two months to expiration.   California contracts quoted at widest b/a.

–OI on futures rose slightly to 33.  OI on options unchanged at 2.

–Forward implied HPA are rising as gains in March were reflected in stronger bids on calendar spreads.  (Still my sense is that forward prices are biased lower by an imbalance of hedgers vs. natural longs).

–Growing interest from option buyers.

–New home price index futures contract for Paris to be rolled out this summer.

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

John

Quiet market reaction to Mar CS #’s

Quotes on the CME home price index futures were little changed after the release of Tuesday’s Case Shiller numbers.  The table shows prices from the Nov ’18 contract, from Mar 26th (the day before #’s were announced) and as of the end of trading on Mar 27th.    Changes in mid-market levels were flat, but some contracts were more than a point higher (e.g. LAX and SFR) and while some were more than a point lower (e.g. CHI and WDC).  

Bid/ask spreads widened Tuesday, but contracted slightly on Wednesday.

The price levels on longer-dated contracts rose slightly, but are still consistent with declining, but positive HPA out past 2020.

Trading has been quiet with only 8 trades in the last week.

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

Feb recap posted

I’ve posted a recap of activity in the CME Case Shiller home price index futures for February in the Reports section, or you can link here.

Activity remains very quiet, and price have been stable, despite huge gyrations in the stock market.

Key points from the Feb recap include:

–There were 3 futures contracts traded in February in 2 regions across 1 expiration.  There were no options trades.

–Activity remains slow with most bid/ask activity in the SFR contracts.

–For Feb, bids and offers were mixed across regions.  Bid/ask on expirations tightened slightly  (except Feb ’19).

–New front contract (K18) bid/ask spreads are about typical with 3 months to go, except SDG.

–OI on futures and options fell as 6 futures and 17 options contracts expired.

–Forward implied HPA are falling, and very mixed across contracts.  (I sense that forward prices are biased lower by an imbalance of hedgers vs. natural longs).

–Growing interest from option buyers.

–New home price index futures contract for Paris to be rolled out this summer.

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

Thanks,  John

 

CME post Feb CS #’s

This morning’s Case Shiller numbers were generally lower than where the CME market had been pricing the expiration of the Feb ’18 contract.  Recall that the Feb ’18 contracts settle on the value of the indices released today.  I would highlight as “surprises” the six index releases (in yellow) that were below the bid side of the CME contracts at some point in the last few days.  In each case, a trader (who hypothetically knew, or could accurately project this morning’s numbers) could have sold contracts (on the bid side) and profited (at $250/point) from the lower Case Shiller index actually released today.

This is somewhat doubly surprising in that the bid/ask spreads for the expiring Feb 18 contracts was wider than normal.

Despite theses “surprises” quotes on longer-dated contracts are about flat since Monday (as measured from mid-market to mid-market).  Note that while CHI and WDC contracts are lower, the DEN, SDG and SFR contracts are higher.  (SFR moved higher based on a trade in X18 yesterday).  Bid/ask spreads are slightly wider.  There have been no trades (yet) today.

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

John

 

 

“mini” recap of Jan activity in CME CS futures

I posted a (late) recap of activity in the CME Case Shiller home price index futures for Jan today, so that people can have a more recent reference point to compare quotes before and/or after Tuesday CS #’s. You can see the “mini” recap in the Reports section, or view here.

To summarize the key observations:

–There were 9 futures contracts traded in January in 4 regions across 3 expirations.  There were no options trades.

–Activity remains slow with most activity in the SFR contracts.

–For Jan, bids and offers generally rose across most regions and expirations (except CHI, and SDG).

–Bid/ask spreads were about unchanged during Jan.

–Front contract (G18) bid/ask spreads have narrowed, except in SDG/SFR.

–OI on futures inched higher from 34 in Dec to 36 (a/o Feb 22). OI for options remains unchanged at 17.

I hope to get a recap for February posted on a more timely basis, but will not get to it until at least March 5th (when I return from a ski trip).

Meanwhile, I’d share that I moved to Washington DC this past week, and would love to meet with anyone in the area who has an interest in this sector.  Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions from this recap, or on the subject of hedging home price indices.

Thanks,  John

CME Market reaction to CS #’s (Jan 2018 release)

Quotes on CME Case Shiller home price index futures were generally higher on Tuesday, albeit with wider bid/asked spreads, following the January release of the Case Shiller #’s for November.  As highlighted in table below, the big movers were the California contracts (w/ SFR much higher, and SDG lower) and CHI (much lower).  (Note, I’m using the Nov ’18 – X18 – contracts for illustration.  In general price movements were of a similar direction along the expiration curves, with longer-dated contracts, particularly SFR offerings, moving more than shorter-dated contracts.)

There were 3 trades -an outright CHI trade, and a CUS (10-city index)/CHI Intercity trade (that showed as two legs).

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

Thanks,  John

 

Dec/2017-recap posted

I’ve posted a brief recap of activity in the CME Case Shiller home price index contracts to the Reports section (or you can access here).

Highlights include:

–There were 3 futures contracts traded in Dec. in 3 regions across 2 expirations.  There were no options trades.

–Volume for futures and options during 2017 (182 lots) was higher than 2015 and 2016 primarily due to increased in options trades.   That said, activity has slowed dramatically over last 3 months.

–For Dec, bids and offers generally rose across most regions and expirations (except ask side of MIA).

–Bid/ask spreads were about unchanged

–Front contract (G18) bid/ask are just under 2.0 points.

–At month-end, there were bids in all 121 contracts, and  two-sided quotes in all contracts out to Nov ‘19, and then X20.

–OI on futures and options remains unchanged at 34 and 17.

–OI remains very concentrated in November expirations (74%).

–Put writers still needed!  I sense that options trading is the way to grow volume, as strong retail preference for taking one-sided risk exposures.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss any aspect of this post (or the recap) or any other aspect of hedging home price indices.

Best wishes for a healthy, happy, prosperous 2018!

John