Approaching May ’18 expiration w/convergence => CS (10-city) HPA expectations (6.4%)?

Every quarterly expiration of a CME Case Shiller home price index contract is an opportunity to remind readers about the cash settlement features of these contracts, and how quotes on the expiring contracts might be used to get a sense of “market-implied” HPAs.

For example, the table below shows (in red) the most recent Case Shiller indices for the HCI (10-city index) and for each of the 10 regional components.  Below there is a section that has quotes on the 11 CME home price index contracts.  I’ve average Bid and Ask to create a mid-market level (“Mid”).  Note that all Mid’s are above the current CS index.

Further, I’ve compared the Mid values on the contracts to the index level from a year ago (i.e. from the release dated May 31, 2017) to generate a percentage gain.  If the Case Shiller numbers released on May 29th are close to these Mid levels, then these percent changes should be the year-on-year gains that you’ll read about in press reports that day.  The headline that day should be that the 10-city index rose ~6.4% on the year and that, once again LAV (Las Vegas) will be the best YOY performer and CHI (Chicago) and WDC (Washington, DC) indices will be the laggards.

So (rhetorically) what gives these mid-market values credibility as projections on the upcoming Case Shiller release?  The answer is that the May ’18 contracts will settle on the index values released this month.  So, to pick an example, if someone “knew”, had researched, or just had a strong view that the Case Shiller NYM index for May will be 199.4, they could buy a futures contract at 198.4, and pocket the $250/point/contract difference when the 199.4 number printed.    (Not a bad return for 3 weeks exposure when required margins might be as low as $2500.)  Alternatively, if they believe the actual number , is lower (e.g. the 197.9 mid-market value) they might also try to be the best bid (in case there’s a sale) and bid greater than the current bid of 197.4.

If they were had much more bearish views they could do the opposite, either hitting bids, or offering lower.

The point is that this market allows both bullish and bearish predictions to play out in a (theoretical) way, such that bids and offers should reflect conservative expectations. Buyers will bid where they think that can make money (versus their expectations), while sellers will do the opposite.  Net, bids and offers, when averaged (i.e. to the mid-market levels) should do a reasonable job in revealing market expectations, for such short time frames.

Feel free to contact me ( if you have any question about this blog, or any aspect of hedging home price index exposure, or would like to discuss a trade.

Thanks,  John