First, as part of their quarterly survey of home price expectations across 100 participants (full disclosure, I’m one), Pulsenomics asked for opinions on how the home prices of 25 regions might perform in 2017. Their results are shown to the right. Please read their report for details on how they quantified relative price moves. For purposes of this illustration, higher (and positive is better and optimistic, while lower and/or negative is not).
Be aware that details of the regions identified (e.g. “Boston”), might be different than your understanding of that region, and important for later, the BOS Case Shiller index.
I then compared this tally versus the year-on- year gains for the these “regions” versus Case Shiller indices of the some name.
Observe (in the graph below) that the regions that have been identified in the Pulsenomics survey that are likely to do well in 2017, are typically the regions that did well in the last year (and vice versa). (FYI – 18 of the 25 regions used in the Pulsenomics survey have public Case Shiller indices. There are others, e.g. San Jose, but you have to subscribe to get them).
Real estate prices tend to have momentum, and so therefore this observation doesn’t surprise me, the current market for CME futures does not necessarily reflect the same high correlation.
First, note in the scatter diagram below that the forward prices for all 10 CME regional contracts (noted on the Y axis) falls below the red 45 degree line (with the slight exception of NYM). (FYI – To calculate the forward CME “prices” (in this graph) I took the mid-market values for the Nov 2018 contract and divided by the spot index (released in Nov). That percent gain is then converted back into annual gains). That is, forward HPA (as implied by CME prices) is much lower than gains over the last 12 months (measured with the X axis).
Second, there seems to be a reversion to the mean (in forward HPA) as forward gains for all contracts are converging to a narrow range (between +1.75-3.50%).
Third, away from any such reversion the slight outliers appear to be BOS (GE move?) and LAV (NFL/ beneficiary of construction?) while the below trend regions include CHI (pensions problems?) and the three California indices.
As I’ve noted (and conceded) in prior blogs, the California contracts seem out of line. While it could be that there are fundamental issues at work in California that I’ve not focused on. My contribution to this discussion is, that there may also be a seller who is larger than my potential interest in going long. In thinly traded markets, a small change in the balance between buyer and seller weight can have a disproportionate impact.
As I look to explain the California under-performance in the last few months, I can find lots of smaller hedgers that also want to sell. If there’s nothing “wrong” with the California real estate market, what do we need to do to entice prospective longs into dipping their toe in the longer-dated California contracts?
I’m happy to post any comments, share thoughts, or facilitate any trading ideas. Feel free to contact me (email@example.com) to discuss this blog or any other aspect of hedging home prices.