CME Case Shiller Futures approaching Nov 26th expiration: Convergence and Forecasts for Tuesday

The CME S&P Case Shiller home price index contract for Nov '19 (X19) stops trading on Monday Nov 25th at 3 PM (Eastern) and will settle on the Case Shiller index values released the following morning (Tuesday Nov 26th) at 9 AM.

As shown in the graph, the X19 contract (in red) and Case Shiller index have converged -consistent with the notion that contract prices reflect index expectations -particularly as expiration approaches.

I'd offer three other high-level observations:

1) The X19 contract has traded in a very tight range since it was introduced in Nov 2014. Such low volatility should have played into pricing of options on the futures.

2) The Nov '20 (X20) contract (in blue) has generally been above the X19 contract -consistent with positive HPA expectations between the two years.^1 I'd note that when the prices turn lower, the spread between the two contracts has compressed, and even inverted in early 2019.

3) While the Case Shiller index has risen consistently since 2014 (recall that this is the non-seasonally adjusted version, so some seasonal patterns show), the futures have seen periods where prices turned lower. While the press has focused on historical CS analysis, and also references surveys or individual forecasts, I wish that they'd give more weight to reactions to these forward-looking prices, where money is at risk.

Convergence can also be shown in each of the expiring ten regional contracts^2. The table below shows bids, offers and mid-market levels for the eleven Nov '19 contracts. Contract bid/ask spreads average < 1.0 point with HCI, BOS and NYM the tightest (benefiting from recent trades). In addition, mid-market levels are compared to Case Shiller index values from a year ago, to give a sense of relative gains. That is -should index levels match mid-market values, expect to read on Tuesday that 10-city HPA has fallen below 2%, that BOS was the strongest of the ten regions, and the SFR saw negative HPA.

While today's bids and offers should reflect all known information on the upcoming Case Shiller index numbers (which recall cover activity through Sept 30) it has often been the case that actual index values fall outside the bid/ask quotes. I label such outliers as "surprises" (to the market). In past quarterly expirations there have been as many as seven and as few as no "surprises".^3 That is, to the extent anyone believes that the index values will be above the ask, or below the bid, there's an opportunity to profit (at $250/point/contract).

Feel free to contact me should you have any questions related to this blog, or any questions related to hedging home price indices.

Thanks,  John

^1- The same holds true for the X21, X22 and X23 contracts.

^2 -Converge graphs are available upon request.

^3- Some "surprises' occur as prior index values are revised.