More post-Aug color. Surprises lead to large moves, trades

There were 12 trades yesterday.  All took place in X14 contracts across six regions (CUS, CHI, LAX, SDG, SFR and WDC).  As is typical for the limited trading in the CME housing contracts, the trades took place a) on a date when the Case Shiller indices were updated, and b) at a time when there was a change in sentiment over price levels.  For example, the biggest trading volume month in the last five years was May 2012 when 83 contracts traded.  That month was the turn from any lingering bearish sentiment to two years of strong price gains.

Yesterday, the Nov ’14 contracts saw good volume (across multiple contracts) and the biggest price move in the last two years.  So, are we at another inflection point, where possibly this time, the bulls are capitulating?

Here’s two illustrations to get the debate going.Surprises Impact on Nov14

The first is a version of yesterday’s table updated to include a review of the Nov ’14 market price moves from the days before the CS #’s were release to late yesterday.   The bottom line shows the price changes that took place.   The mid-market levels were lower on 9 of the 11 contracts (with the only two exceptions- LAV and NYM – being regions where the Aug CS index #’s were higher than Aug 2014 contract mid-market levels.)

For the remaining nine contracts the decline in Nov ’14 mids was a multiple of the “surprise” from yesterday’s indices.  This seems to make intuitive sense as a one-month surprise of, for example, 1.0 point, might infer a change going forward over the next 3 months, resulting in magnified price moves.  (While the Nov ’14 contracts bore the burnt of price declines, back contracts did not move as much.  We’ll see what happens today).

Second, here’s a graph of the Nov '14 price graphNov ’14 closes over the last year.   Futures prices jumped higher over a year ago, and index levels have been slowly catching up, month by month.  In fact, while all of the press has focused on rising home price index levels, the graphs shows that futures prices have been relatively stable (at the higher “predicted” levels) – that is, until yesterday.


Third, while futures prices took a big hit yesterday, prices for the Nov ’14 contract are still higher than spot level reflecting seasonal factors Nov 14 vs spot(of 1-2% on the CUS contract).  (Recall that the headline CS indices are not seasonally adjusted).  the CME contracts are consistent with index gains of ~1 to 3% over the next 3 months.  To put that in perspective I added the gains over the last 1 and 3 months below the graph.  Both LAV and NYM (yesterday’s two strongest contracts) are the only two that seem to be pricing in gains near the amount recognized over the last 3 months.

Thus, it seems that we will still be getting “home prices rise” headlines for the next few months.

Feel free to contact me ( if you have any questions on this blog, CME activity, or if you have any “axes” that you’d like touted.

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