While many reports focus on the historical robustness of home prices (e.g. “FHFA Home Prices See No Slowdown”), and some pundits have only slightly revised lower their forecasts for home price gains for 2019-20 lower, quotes on the CME Case Shiller home price index futures are consistent with more bearish outlooks.
The graph below highlights how much CME contract closing prices have fallen since Sept 5, 2018. The graph shows the Case Shiller HCI (10-city index) in black, and then graphs of the closing prices for the available contracts for Sept 5, 2018 and Jan 23, 2019.^1 Below the graph I’ve shown the drop in closing prices, as well as the percent decline. As I’ve written before, note that forward prices (i.e. Nov ’20/’21) are now below spot levels (“inverted”).
Similar graphs are available in the Reports section (or access here) for eight other regions. Those graphs illustrate that CME contract price declines have not been uniform. For example, the SFRX20 (Nov 2020) contract is lower by more than 8%, while the LAVX20 contract has barely moved.
Much has been written about inventory shortages providing support to lower-prices home, while at the other end, prices in the more expensive, global cities (e.g. Toronto, Sydney, London) have been coming under pressure. The scatter diagram below maps the changes in regional X20 prices versus the Case Shiller index cut-off for high price homes. ^2 Regional home price index changes appear to be correlated to regional prices (as measured by the cut-off in high priced tier). SFR (and the two other higher-priced California indices) has sold off the most, while LAV (the area with the second-lowest high price home cut-off) has barely moved.
Again, the standard qualifiers for what users might read into this information applies. Contracts are thinly traded (with only about ~100-150 contracts traded per year over the last three years), and many of the quotes are mine. In some contracts (e.g. BOS, LAV, MIA, and WDC) there is no open interest. However, quotes posted on the CME were, and are, live. Users were able to (and did) sell SFR contracts before the collapse in prices.
While some point to lack of volume to question posted levels, I’d submit that as market maker, my role is to take inquiries and continually adjust prices to levels that I think will bring balance to markets, or to where I’m open to both bidding and offering. So, even if there have been no trades in some contracts, contract prices may have moved as a result of feedback on users’ views. In that sense these markets reflect more than just my views.
I’ll concede that as sentiment becomes ever-more one-sided (as the vast majority of the inquiries I receive are from hedgers), contract prices may be (ever) lower than expectations. Such an imbalance of orders, might present an attractive opportunity to risk-taking entities (e.g. insurance companies, pension accounts, hedge funds) looking take exposure to a new sector trading below expected levels.
Please feel free to contact me (firstname.lastname@example.org) if you have any questions on this blog, or any aspect of hedging home price indices.
^1 Note that where there are no open contracts (e.g. Feb 21, Aug 22) contract prices have been interpolated.
^2 Recall that Case Shiller indices are available by price tiers: https://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index