April Case Shiller #'s. On to an uncertain May

The Case Shiller indices, incorporating activity through February, were released Tuesday morning. This was the last update exclusively from the BC (Before Coronavirus) timeframe, and as such, the numbers reflected the strength in home prices that had been playing out since Fall 2019. That is, all 20 Case Shiller regional indices showed seasonally-adjusted gains over January.

Since Tuesday's numbers reflect a different environment, I can't see how they had any impact of forward contracts (and as such have left off my monthly table of change in benchmark contract prices.)

Now things should begin to get interesting as the May Case Shiller release will include activity from March. Housing researchers have begun trying to distill how much (if at all) the declines during March in listings, showings, pending sales, and/or closings will impact May numbers. That debate cascaded into trading in the May HCI (10-city contract) with 8 lots traded at four different prices (ranging from 226.0 to 232.0) after numbers were released.

The table below shows historical index levels and the May 2020 (K20) bids, offers and mid-market levels from late Tuesday. As a general rule, offers are at slight discounts to spot levels (with LAV and NYM a tad lower). Bids average about 97-98% of spot, so some small amount of negative impact is being priced into the contracts. (Recall, that absent the virus, seasonal factors and positive HPA would have combined to create May index (release) numbers that were slightly higher, so the discount from "no virus" might be an inch bigger).

Typically, with one month to expiration, bid/ask spreads are all below 2.0 points and several may be <1.0 point. However, given the current uncertainty (and range of prices traded yesterday), the HCI (10-city) contract has a 4.0 bid/ask spread, and all the regional contracts are wider still.

Net, I expect plenty of disagreements over projections of the May Case Shiller numbers, as researchers get more information on March activity. Despite the wider bid/ask spreads, May '20 looks to be a hotly debated contract.

I'm open to fostering any outright, or intra-May trading ideas. That is, I've set up (wide) Intercity spread levels -consistent with LAV and NYM under-performing, and BOS, SDG and DEN out-performing. Feel free to contact me if you'd like to chat about trading any of these contracts (or pairs of these contracts) either for more than the one lot typically shown, or at prices inside quoted levels.

Separately, it seems as if the May '20 contracts will trade in a world separate from the other expirations, and that the contracts are breaking into almost separate groups that may move differently from each other. That is, the Aug '20 contract will reference the first complete "During Covid" timeframe (April, May and June) and a whole separate set of issues (e.g. forbearance, forced sales?, economies re-opening?, the willingness of Independent Mortgage Bankers to take on servicing risks) will drive clearing levels. November '20 and Feb '21 will probably somewhat track Aug '20 with versions of the same themes, but then the intermediate expirations (e.g. Feb '22, and the Feb'23 that I'm treating as a benchmark) will likely price off post-Covid themes (i.e. which party holds the Presidency and the Senate, will buyers come back, where will they prefer to live, will they qualify, how will lenders treat borrowers both with damaged employment histories as well as how will they approach lending in general). Finally, the longest contracts might be where investors finally show up, taking advantage of locking in five-year forward prices near spot levels.

Note that the performance of any of the contracts from Aug '20 on will also likely be very dependent on issues related to the Covid virus (e.g. the tenure of lock-downs, possible second waves, the pace of testing, the roll-out of vaccines).

These separate groups might tend to diffuse interest, with different users not caring what happens in the other. On the other hand, this separation of activity into different groups may present interesting opportunities for those that want to express relative value in one group versus the other, or how COVID will play out, via Calendar Spreads.

Net, there's a lot of reasons to disagree, a lot of people who might want to hedge, and an opportunity for investors to buy forward contracts at prices below spot (something that they haven't had the chance to do in >10 years).

With multiple groups, and with COIVD risks weighing on all contracts, I will likely maintain wider bid/ask spreads and as such, I'd encourage readers to share their trading ideas. I'd be happy to post as part of daily price suggestions at https://www.homepricefutures.com/quotes

Please feel free to contact me to discuss the themes in the blog, any trading ideas, or any aspect of hedging using home price index derivatives.