Quotes on the CME S&P Case Shiller home price index futures have shifted much lower in the last six weeks.^1 Forward curves have moved from prices consistent with positive HPA (home price appreciation) from 2022-2025, to flat and even declining future prices. Closes on the 10-city index (HCI/CUS) contracts (in purple) have fallen from the peak levels seen in early May (light blue) and are now below the closes for these contracts at year-end 2021 (in green) for longer-dated contracts. Calendar spreads (see G23/G24 quotes box on right side) are priced with the February 2024 contract priced lower than the February 2023 contract.
Housing investors might consider taking these futures prices into consideration when analyzing forecasts-particularly at market turns - as even the broadest poll of home price forecasts (https://pulsenomics.com/surveys/#home-price-expectations) is published with a delay. By contrast the CME futures prices are updated in real time. (FYI - Average gains in the Pulsenomics survey for 2023 and 2024 were 4.2 and 3.1% vs declines in prices implied by CME futures.)^2
Prices for the August 2022 expiration remain above spot as the Case Shiller reference for settling that contract covers the period April to June -a period that has historically had strong seasonal factors, where the full impact of higher mortgage rates may not have been felt, and where recent prices may have benefitted from buyers looking to lock in lower mortgage rates. Prices are lower on the Nov 2022 contract and fall further to Feb 2023 (the contract that references the period ending Dec 2022).
While I respect the challenges from those who argue that the Case Shiller indices present a lagged picture (as the index is a moving average with a two-month delay), and that therefore it may not reflect changes in current sentiment, that is not an issue with the longer-dated futures (e.g. the Feb 2023-24-25 contracts). These contracts, which cover unknown activity in the future, might convey more information on expectations, than any backward looking YOY analysis of any home price index. (Note that if, in August 2022, the 10-city index prints at the current mid-market value (328) of today's August contract quote, pundits will be reporting a YOY gain of >16% (328.0/281.3) four months after futures prices began to fall.^3
However, while futures will settle on the level of future index values, and therefore may have an element of expectations, I feel that it is important to qualify my views/caveats/experiences on certain points:
a) It's important to remember that futures prices, particularly on longer (i.e. > 1 year) expirations, are levels where buyers and sellers are willing to add/reduce risk, and are not just a debate as to where users expect index values to be at some point in the future. Trades in any market occur for many reasons beyond future expectations. Further, much as boat, car, and life insurance isn't priced at "fair value", these home price futures contracts (and HPHF OTC agreements) provide an opportunity for users to improve their risk profiles should they feel that they have too much or too little exposure. It should be therefore no surprise if sellers get comfortable at prices below expectations. Users will "pay" through fair value to reduce risk.
b) The contracts have been extremely thinly traded -often with my taking the other side on 75+% of the trades - so a big wave of buyers or sellers can swamp recent clearing levels. Recently, I've had many more inquiries from sellers than buyers, including some that got off sales in HCIG24 at 340. Bid prices are quite a bit lower than last trades (e.g. HCIG23 traded at 312.0 on Friday) as rather than trying to maintain tight bid/ask spreads, I am more likely to wait to see where buyers come in, where hedgers will sell, and where prices will settle.
b) While speculators play an important role, it is the natural longs (those with less exposure than they'd prefer) and the natural shorts (those with more home price exposure) who "should" dominate clearing levels. While I've had numerous discussions (and trades) with people looking to hedge gains, home flippers worried about forward prices, and builders looking to hedge 12-18 month forward production, participation by natural longs has been spotty.
c) That's because the natural longs have historically fallen into two categories, both of which have been challenged by features of the Case Shiller futures market. On the one hand there is the community of people who don't own a house -think renters and Millennials. Renters may have preferences for flexibility, or like some Millennials, they may have a hard time saving up for the first down-payment. I've blogged in the past that this group could achieve the price exposure of a bite-sized exposure^4 to home prices by buying individual futures contracts. For example, the notional value of one BOS (Boston) contract is $75,000. However both groups typically have little in savings, and may have concerns (or face suitability issues) in trying to open a futures trading account.
On the other hand, institutions that might want to add to home price exposure (e.g. pensions, endowments, and any fund that believes that nominal home prices are a hedge against inflation) might be challenged by the small amount traded, the size of their exposure vs. market activity, and given the lack of depth, the volatility in prices.
Another historical pushback from potential nature longs is that while the futures have typically traded at a premium to spot, they want to buy a product that will participate in home price gains.
However, as in any market, should prices overshoot (in this case to the downside) there may be an opportunity for counter-traders and natural longs to take offsetting positions. There may be such a case now as forward prices are below spot for one of the few times since 2012 ^5 That means that someone looking to buy a house in the next year can lock in prices a year or two from now at today's index values. Importantly, they don't have to make the binary decision as to when to buy 100% of the future home's value, but can buy exposures in one-lot pieces. In this way, buyers can "dollar cost average" buying fractional exposures at different times.
In addition, institutional buyers looking for home price exposure might consider buying publicly priced futures at a discount to spot as alternative to buying exposures to shared-equity programs (if those are created at today's spot values.) Hedging interest should allow trades of 10-20 lots (~ $2mm notional in the LAX contract). SAM buyers might consider buying contracts for Feb 2024-25 expiration and then swapping into home equity monetization programs when they get bigger, and or as digital finance products evolve. ^6
Finally, while the above graph shows quotes for the Case Shiller 10-city index, the forward prices of individual cities may be even further below (or above) spot levels. Expressing a view on such forward levels can be accomplished in the CME futures (where the SFR contract has some of the most bearish relative pricing) or in OTC HPHF Agreements, where, for example, I've offered Phoenix exposure for Feb 2024 below spot.
Net, this market has historically been either a Sellers Market (for most of the last ten years) or in stressed periods like today, a Buyers Market. This had limited growth in activity as the out-of-favor side has tended to sit back to watch how far prices overshoot. However, there may be a unique opportunity to grow the market during this cycle as the fundamental demand from Millennials, as well as the appetite for finding inflation-friendly assets for institutional buyers, remains, despite concerns of a weakening economy.
Please feel free to contact me about entry levels that might make sense for potential longs (or shorts), as I expect additional homeowners are embracing a desire to hedge the gains they've seen over the last 5-10 years.
Further, keep in mind that I'm open to writing HPHF Ratio Agreements^7 on many cities if you are looking to add/reduce exposure to a particular city and are concerned about basis risk between the CS 10-city index and that area.
Thanks,
John
^1 I'm only showing quotes on five (of nine) expirations as I believe thinly traded contracts benefit from fewer expirations
^2 FYI #2- I am a long-time participant in the Pulsenomics survey and am very appreciative of their work.
^3 See my July 20 blog https://www.homepricefutures.com/posts/the-shortcomings-of-backward-looking-yoy-analysis-on-home-price-indices-why-cme-futures-might-be-a-better-forecasting-tool for further details.
^4 https://www.homepricefutures.com/posts/reduce-the-stress-of-100-rent-vs-100-buy-decision-with-bite-sized-pieces
^5 Forward prices fell below spot for a short time in 2018 when home sales in California fell, and then later in 2020 when Covid fears roiled the market. In both cases forward prices returned to being above spot over the next few months.
^6 Feel free to contact on me for discussions on evolving programs.
^7 https://www.homepricefutures.com/posts/the-evolution-of-ratio-agreement-template-how-to-read-quotes-for-raleigh-e-g