CME CS Futures vs. Expectations

Last week I reviewed how the CME Case Shiller futures lined up against the DB 3-year forecast on home prices.  Today (Dec. 26) , the Pulsenomics/Zillow home price survey (for home prices out to 2017) was released.   (click here.)  This is the best survey of forward home price expectations, is printed quarterly, has a large sample size of over 100 real estate “experts” (full disclosure: including me), and should be on anyone’s radar who deals with home prices.  Here’s a comparison of the results of that survey versus the CME markets.

First, there are some features of a comparison to the Zillow survey that existed in the comparison to the DB forecasts.   Recall that the DB survey (as well as Zillow) was listing forecasts for changes at year-end, while the most liquid CME future is the November contract that references the 3-month period ending in September.  Thus not only are the forecast periods slightly different, but the mismatchs introduce some seasonality that can’t be resolved with straight-line exptrapolation.  Further, while the DB report was written a few days prior to the CME market prices I compared them to, the Zillow survey participants made their forecasts between late November and mid-December.  As such expectations or markets might have changed.

Finally, the Zillow survey references the Case Shiller National Index, while the CME futures reference the CS 10-city index.  The 10-city index covers the larger metropolitan regions (e.g. LAX, NYM) and as such may experience different price paths (both historical and going forward) than the National index.

Given all of those qualifiers the graph below highlights elements of the survey and the CME futures.

The black line is the historical CS CUS (10-city) index.  The blue and red lines are the )Dec. 26) bid and offer lines for the CUS contracts that expire between Feb 2013 and Nov 2017.  All three reference the left axis.  The large blue squares represents the average of the Zillow survey, and the dashed lines above and below the squares represent +/- 1 standard deviation.  Those numbers are scaled to the right axis.  There is also a large brown square that represents the value for CUS-10 for December 2011.

The horizontal axis is the month in which the index is reported (so November for the later CME contracts and February for the year-end forecasts.

To illustrate, the CME Feb ’14 market (the one that settles on the Dec 2013 index) was 15880/16640 or 6.2%/11.2% above the Dec. 2011 value (149.59). (Recall that the CME trades at CS values *100).  While the average forecast on the Zillow survey for home price appreciation from Q4 Dec. 2011 (7.87%) was inside this 6.2-11.2% range, more than 30% of the survey respondants were either more bullish than 11.8% (above the offered side of the CME contracts) or more bearish than 3.94% (well below the bid side of the CME contracts).  It sounds like there should be some trades from these outlier bulls & bears (or at least from their clients.)

While the Feb 2013 and 2014 CME contracts reference the same year-end periods as the Zillow surveys, there are no Feburary contracts beyond 2014.  The graph illustrates the timing differences.

Even given all of the qualifiers, one can observe that the Zilow averages tend to fall below the CME mid-market levels, often just about on top of the CME bids.  Either the futures markets tend to be more bullish, OR, the differences between characteristics of the two indices are enough to justify the price differences.

If one believes that the larger CME markets are going to out-perform the National index, then relative shapes of the two graphs might make sense.  But, if one believes that the regional markets (think Phoenix, Charolette, Seattle) are going to be stronger than NYM and LAX, then either Zillow expectations are too low, or futures prices are too high.

As with many discussions about home price forecasts, then, this discussion comes down to an understanding of the differences between the various indices being discussed.  One can’t say that either the CME futures or the Zillow results are out of line, without having a view on now the Case Shiller National index is expected to perform relative to the 10-city index.

If you have ideas on that debate, please feel free to share them by contacting me at