Dispersion of home price expectations

I continue to rely on (and participate in) the Pulsenomics quarterly survey on home price expectations (click here) both as a check against CME Case Shiller futures, and to identify economists with outlier calls.  (“Come on guys.  Back up your opinions with a trade”.)   While the Pulsenomics survey uses the Zillow Home Price index, and the CME contracts reference Case Shiller indices, there’s a lot of parallels where knowledge about one product can be transferred to the other.

While I’d encourage you to go through the Pulsenomics link for the levels of home price expectations, I want to bring to your attention a trend in the survey results that should have good implications for trading in home price futures.

I’ve highlighted for months that bid/ask spreads in CME contracts have been compressing, and have noted that this should be a good precondition for trading, but some readers have observed that most of the contracts are quoted 1×1 (that is one lot bid, worth ~$50,000 on a contract priced at 200.0, versus one lot offered).  How can readers get comfortable that the narrowing in bid/ask spreads might be indicative of wider forces?

The table to the right shows that while the level of Zillow Stan Devhome price expectations in the Pulsenomics survey over the last five quarters for 2017 and 2018 has been range-bound, the dispersion around those results has been narrowing rapidly.  That supports the notion that there is greater consensus in expectations, less risk of a outlier event, and is therefore consistent with narrower bid/ask spreads in CME futures.

Pulsenomics conveys this theme in an even better graphic format here: (Focus on the black line)

Pulse sd graph


Trading in CME contracts remains near historical lows, and I’m not aware of any OTC trades, but I would argue that the trend of declining standard deviation of home price expectations identified in the Pulsenomics survey should bode well for future trading opportunities.

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog.