I'm going to revisit my belief that longer-dated CME Case Shiller home price futures might be clearing at levels below sentiment. I posted earlier on this notion in a blog on Sept 19th (CME Futures: Expectations vs Clearing Levels, Opportunity or Bias?) but would like to explore a different angle today. Recall that my observation as market maker is that I see many more "Natural Sellers" than "Natural Longs", and the theory that that leads to contracts clearing at a discount, which may be an opportunity for Speculators or Natural Longs.
Core Logic recently raised their forecast for YOY home price index gains through Aug 2020 to 5.8%, which is much stronger than the 3.6% they tallied for Aug 2018-Aug 2019. Now Core Logic measures indices differently, and the Core Logic index covers a much broader geographic reach that the Case Shiller 10-city index (referenced by the CME contracts), but still it strikes me as worth contrasting how sentiment is showing for higher gains over the next 12 months, while most CME contracts are quoted at prices consistent with a weakening in HPA.
The table below shows (to the left) the Core Logic forecast of 5.8% is ~60% stronger than the past year. To right I've tallied the differences between the YOY changes in the Case Shiller indices from Aug '18-Aug '19 vs. the implied gains for the Aug '20 contracts, measured both versus the mid-market values and ask prices. Note (highlighted in red) that for 9 of the 11 contracts using the mid-market value (and for 7 of the 11 contracts using the ask price) that implied YOY gains are lower than the previous year. Net the CME contracts are priced consistent with a slow-down for Aug '19 to Aug '20 while CoreLogic is calling for higher HPA.
The Core Logic forecast is a nationwide call, so that will include some areas that will slow, but the contrast between Core Logic forecasts and CME quotes is dramatic.
Again, there is limited depth to the CME contracts, but I do sense that larger-sized sellers are available should anyone have an interest in the 10-city or selected regional contracts.
Please feel free to contact me if you have any questions about this blog, interest in discussing trading ideas, or any issues related to hedging of home price indices.
Thanks, John