For the last two months, I’ve been writing about how quotes in longer expirations have been coming down, both on an absolute basis, as well as against front contracts. No contract reflects that trend better than SFR. In addition, I find that when you get changes in sentiment, trading volume tends to rise as those who embrace the more current thinking, are more likely to cross paths (resulting in a trade) with those who have older outright or calendar spreads.
This has been the case this month as there have been 13 CME contracts traded -ALL in the SFR contract. While 13 contracts is slightly more than the recent historical monthly average across CME housing contracts, the 13 traded lots have occurred: a) before mid-month, and b) as I noted, in one region. In addition, trades have taken place across five expirations. In making markets for five years, I’ve never seen all trades take place in one region.
The table below reflects the flattening trend. Quotes are shown for Nov 14th and Aug 31. Bids and Asks are averaged to give mid-market levels (which I find more useful for this analysis than closes). Note that mid’s have fallen over 8 points on the X20 contract. While some of this appears to be consistent with quotes falling across SFR, it does reinforce the “crack the whip” ice-skating mindset. For example, if one-year HPA assumptions changed 0.5%/ year, you might observe price changes in the four-year expiration to be some multiple of that.
While SFR forward contracts once were priced at levels where index gains (on a % basis vs. spot levels) would out-perform the CUS 10-city contract by 2-3% over four years, at current levels, SFRX20 is quoted at about parity with CUSX20 (in terms of % gains vs. spot).
Even if these price moves are unique to SFR (and there’s no reason to believe that’s so) price declines would factor into the CUS index (as SFR weighing is about 9.2% of the 10-city index) which would lower the CUS contract values. Since many other regions have quotes that are linked to CUS contracts by intercity spreads, a decline in SFR should (and has) pulled down other contracts.
I get most of my hedging inquiries about the California (and Denver) contracts, so one might expect some hedgers at work. That said, it might be a useful exercise for longer-term holders to pick a level where SFR is attractive versus CUS or other regional contracts.
Please feel free to contact me (firstname.lastname@example.org) if you’d like to discuss this, or have any trading axes.