While many researchers and realtors are squaring off on the questions of whether home prices are strong (yes), and whether they will fall (yes), and does a sell-off represent a change in philosophy, much of the debating can be put in context with prices from the CME Case Shiller home price futures contracts.
The table below shows quotes on seven expirations for the HCI (10-city) index. The graph below superimposes those quotes versus the historical Case Shiller HCI index. The Aug '20 contract is priced above the most recent spot Case Shiller index values (black line) as a: there is mix of low inventory and low mortgage rates (both due to Covid), b) people looking to move the suburbs (from rentals) to more comfortably sequester in place, c) some portion of employees might transition to working from home beyond Covid, and d) demand from the spring selling season got pushed forward into summer month. (Note that the Aug index references activity in April-June, a period before many parts of the country experienced a surge in Coronavirus. Keep an eye on the Nov '20 contract - referencing July-September -for the impact of a switch to a summer selling season).
The combination of these temporary techicals / transition issues may have created a short-term shock, driving home prices to higher than they might otherwise have gone. It might then not come as a surprise that when those factors begin to play out, that demand might taper, fewer unemployed borrowers might qualify for mortgages, AARP generation members will see this cycle as an opportunity to put their (too large) homes on the market, and prices could slide. However, while prices in Aug 2021 might look lower than from Aug 2020, the comparison will be to an artificially inflated starting point. Comparing year-end 2019 home price indices (so the Feb Case Shiller release) of 231.54 vs. the mid-market values for Feb '21 (so year-end 2020) and Feb '23 (so year-end 2022), of 228.2 and 229.5 will show an essentially sideways market with temporary bump in the summer of 2020. (Recall that my sense is that contracts clear at a discount to expectations due to an imbalance of hedgers (many) and natural longs (few).)
Net, both bulls and bears will be right, if they get to pick the relevant time frame, but in the long run, i.e. through the cycle, home prices futures are priced consistent with a sideways market (vs. 2019 year-end). Yes, August 2020 headlines will report YOY home price gains, and August 2021 headlines may report YOY home price losses, but both are likely to miss the longer-term trends. The bulls have the advantage in that there's SO much focus on historical (backward-looking) data, and some reactions to the bearish forecasts are dismissed as mere "opinions". I'd submit that the CME Case Shiller home price futures can act as a forum to give forward-looking views more weight as quotes are backed by capital-at-risk.
The contracts clearly would benefit from more volume (as most of the quotes are mine), but I'd be happy to facilitate (or match!?!) bullish and bearish inquiries.
The same story (i.e. Aug '21 prices lower than Aug '20) is priced into each of the regional contracts. The Q20/Q21 calendar spread markets show bids and offers where one might (on the bid side) buy the Q20 contract at a premium to simultaneously selling the Q21 contract. (The offered side shows levels for the reverse of that trade). All 11 regional O20/Q21 calendar spread contracts are quoted with Q20 (Aug '20) at a premium to Aug '21.
Since the contracts trade at different levels, I find it useful to translate the points spread into percent terms (to standardize comparisons). Those results are shown in the far right column, using the mid-market to mid-market values of each region. The percent price discounts range from -3.22% (BOS) to -7.71% (LAV).
Feel free to contact me if you have any questions about this blog, have trading ideas for the Q20/Q21 spreads, or the Q21 outright contracts, or the broader topic of using home price index derivatives in hedging strategies.
Thanks,
John