Dispersion across forward Case Shiller indices

With tighter bid/ask spread, other traders weighing in with quotes, and a clear slowdown HPA growth, differences in forward price gains across the ten CUS-10 components are starting be more evident.

The bar graph below shows CME Case Shiller futures prices translated into percent gains versus today’s spot indices.  The bottom of the column is the bid, the upper end is the offer and the hash mark on each contract is the mid-market value.  The relative height of each bar reflects the size (in % terms) of the bid/ask spread.  For example, the SFRX17 (Nov ’17) contract was quoted 235.4/239.6 or 9.1%/11.0% above the  215.84 spot index.  The CUS-10 index contracts (shown here as HCI) tend to have the tightest bid/ask spreads, while lower dollar price contracts (e.g. CHI and LAV) tend to have the widest.

Since most interest is in the contracts out to Nov 2017, I’m showing the Nov ’15, ’16, and ’17 contracts here.   Using the same expiration cycle (i.e. Nov) minimizes any seasonal distortions.  The graph illustrates that contrary to any headlines touting declining seasonally-adjusted prices, that market prices are consistent with further (albeit small) price gains.  (BTW -the lopsided interest in hedgers vs. the relative dearth of those looking to take synthetic longs might only tend to put more downward pressure on forward prices.  Clearly, those looking for declines in home price indices can take advantage of the higher-than-spot prices in the longer dated contracts.)

Calendar Spread_OCt

Beyond the higher forward prices, those regions that have tended to have relatively stronger recent HPA (e.g. DEN, MIA, SFR) tend to have higher forward price gains, while those that have been relatively weaker (e.g. CHI, WDC) tend to have lower forward gains.  Over the last two years, such higher forward gains were somewhat more difficult to discern, or trade on, as, for example, SFR bids were strong, but not necessarily through the CUS index.  However, the combination of the HCI Nov ’16 and Nov ’17 bid/ask spreads being so tight, with improved (narrower) bid/asks spreads in many regions, one can more easily see greater regional dispersion of the ten CUS components.

One can see via this graph that, for example, not only are Nov ’17 SFR mid-market prices higher than Nov ’17 LAX prices, but that the bid for one contract (SFR) is higher than the offer for the other (LAX) (based on percent vs. spot terms).  A key observation then isn’t that the market is priced such that SFR will outperform LAX over the next ~2 years, but that the market is priced such that SFR will outperform by ~2.5%

I remain very interested in fostering the debate (or better still, trading of) spreads where one can express a view on implied forward price gains of any one region (so calendar spreads) or implied forward gains of one region vs. another. (i.e. intercity spreads).   There are numerous intra-regional trades (e.g. BOS v NYM or NYM v WDC in the Northeast or LAX v. SDG, LAX v. SFR in California) that one could debate, as well as the performance of any region vs. the HCI contract (on the 10-city index).

Feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to stir the pot on this conversation.