The Feb '21 (G21) CME Case Shiller home price index contracts end trading at 3 PM (EST) on Monday and then settle on the index values released Tuesday morning (at 9 AM). As with the rest of the world, it's been a weird year for the contracts.
Contract prices (in blue in the diagram below) started 2020 above spot index levels (in black). This has been the case for most contracts since 2012 as forward prices (used for settlement) are typically quoted above measures of past history (the index values). That is, some part of shorter expiration contracts measures expectations.
However, contract prices collapsed last spring, to levels that, in hindsight, were probably below any sense of expectations. As such, prices during that phrase probably were more impacted by the notion of where one might transfer risk. That is (as with other markets) with so many longs looking to hedge against outlier scenarios, markets felt very one-sided with a large number of motivated sellers on the one hand, and few buyers with limited capital (to include me) willing to take the other side.
The surprising notion to me, is that rather than contract prices rallying to above spot levels in late August, it took the markets ( and me posting quotes) until December to post quotes above spot levels. I know that I was worried about possible sellers for much of the fall, but in hindsight, my quotes were too low for too long. The rise in home prices post September (when activity has historically slowed down) caught me off guard. A few buys from third parties would have likely pushed contract prices to a premium much earlier but the Oct-Dec trading period was the lowest quarterly volume in 8+ years. Yes, bid/ask spreads were wide (which may have discouraged third party participation) but that too would have been addressed had users contributed bids (or even just discussed a willingness to buy). Prices were too thin, and probably reflected more risk-aversion that it "should" have. Greater third-party participation would have solved those biases, and other problems. Net, I need others to help weigh in on prices of shorter expiration contracts for these markets to better reflect expectations.
That said, it seems that this market has returned to some sense of "normal". Bid/ask spreads on the expiring Feb '21 contracts have narrowed to ~1.5 points (w/ no regional contract >2.0). (See table below). Narrow spreads at expiration have historically attracted some trading the final day of trading, and I'm hoping to see some on Monday. ( A note: Even while the index and contract prices converge, I look for the number of index "surprises" (defined as an index update outside the bid/ask range on the expiring contract). Given the challenges the officials face in amassing data on home closings, I'd expect more revisions to past indices, which may push Feb index values outside (the already narrow) bid/ask ranges.) That is, watch for a large number of "surprises".
A comparison of mid-market quotes vs. index levels from a year ago, suggests that Tuesday's headlines will tout over a 9% gain on the 10-city index (w/ greater gains for the less densely populated Case Shiller 20-city and National indices). San Diego (SDG) will show as the best of the ten CS 10 regions, while Las Vegas (LAV) will bring up the rear (given concerns about the hotel, conference and tourism industries).
Beyond the February contract, I've also made recent adjustments to May and Aug contracts to better reflect continued strength in home prices. (Most of this will play out via calendar spreads once K21 becomes the front contract). For example, the graph below shows continued gains in the May '21 (K21) and Aug '21 (Q21) quotes (so short enough to reflect expectations), while the longer-dated contracts remain quite flat (possibly reflecting risk-transfer levels that are below expectations).
Please feel free to contact me if you have any questions related to this blog, or if you have any trading ideas that you'd like to discuss. Note that the last graph above can be modified to show any of the ten regional Case Shiller contracts. In addition, keep in mind that OTC one-year forward quotes are available on 40+ other cities for HPHF agreements.
Thanks, John