A market for 2015 HPA projections?

With yesterday’s release of the Case Shiller index numbers for Dec. 2014, several research firms have posted their projections for home price appreciation (HPA) for 2015.  What can you do with these forecasts whether you believe them or think that they are too bullish/bearish?

I’d submit that the CME Case Shiller Feb ’16 (G16) contracts gives analysts a tool for both seeing what “the market” thinks as well as a platform for traders to express a view on 2015 HPA.

The diagram to the Feb 16 Calendar barsright shows bids, offers and mid-market values for the 11 CME housing contracts for Feb ’16, converted into percent changes versus the year-end Case Shiller #’s released yesterday.  Recall that the Feb ’16 contract settles on the CS #’s released that month, which will be the index as of Dec.2015.  As such, one might use the Feb ’16 contract numbers (bids, offers and mid-markets) for implied 2015 HPA.

The HCI contract (the one referencing the CUS 10-city index) is quoted at levels that translate into 3.8-4.6% increase in the CUS index between now and contract expiration.  This seems in line with some research reports.  (Recall that different indices- e.g. Zillow, Core Logic, FHFA reference different data, so projections may differ.)   All ten regional markets are also quoted so users may infer forward HPA for specific regions (or trade).

As I noted in yesterday recap. bid/ask spreads in the Feb ’16 contract widened out as many quotes had been a function of Feb ’15/Feb ’16 calendar spreads.  While bid/ask spreads are tighter today, they still have a way to go.  I expect to see much tighter G16 markets over the next few weeks.

Nevertheless one can already see trends (e.g. quotes on SFR and MIA are consistent with those regions performing better than average (defined here as the CUS 10-city index) while LAX and WDC prices are consistent with lower projected HPA.

On can trade outright G16 markets, or trade one region on a spread versus the other (or the CUS 10-city index).  I’m trying to develop inter-city spread trades and would be very open to trade proposals for any regional G16 contract vs. the HCI contract.

Feel free to contact me at johnhdolan@homepricefutures.com if you have any questions or if you’d like to discuss a trade.