The CME home price index futures had an "odd" reaction to the Case Shiller numbers released on Tuesday. As illustrated in the table below, the new index values fell within the bid/ask spread of the expiring May '21 contracts in 9 of 11 cases - a better than average result - and the outliers were slightly below the bids. (Take note that NYM was below the bid/ask spread despite last month's index being revised up 0.47). That would historically suggest a quiet reaction in longer-dated contracts.
However, the benchmark Feb '22 (G22) contracts soared in price (with the exception of NYM). BOS gained 5.0 points ( impacted by one trade), while the SDG22 contract was higher by almost 9 points. Implied percentage YOY gains for Feb '21 to Feb '22 are above 10% for the majority of the contracts. (Note that bid/ask spreads have widened -typical after the release of Case Shiller #'s - so higher bids will only take the YOY percentage gains higher still.)
The discrepancies between the two charts is illustrated in this final graph (below), and speaks to some of the themes that I've been touting the last few months. That is, until the forward contracts hit their "convergence glide path", my sense is that prices have historically cleared at levels below expectations. That is, if there are more natural sellers than buyers, the clearing level has to be at a discount to expectations ("fair value"). With the expiration of the May '21 contract, analysis on the factors that will influence the Feb '22 index values (i.e. activity from Oct-Dec 2021) are getting close enough that researchers are more likely to extend present (very bullish trends) into that ever-shorter future. The question for Feb '22 clearing levels is what is likely to change between now and Oct-Dec that forward HPA, but why current trends will NOT continue (and I don't have a quick rebuttal).
As such Feb '22 prices are moving from where an imbalanced market will clear, more toward projected values based on current trends.
To add to this, my sense is that while markets have historically been skewed toward more natural sellers, the flow of inquiries I've received over the last few months, has been much more toward "how can I add near-term exposure to home prices?".
However, while there has been demand for "as near to spot as possible" exposures, the more distant contracts remain abandoned. That is, I've seen few hedging inquires (as who wants to hedge in a bull market?!?) and most buyers want spot exposure. My next focus will be on the Feb '23-'24 contracts as either implied HPA are too low, or there's a big slowdown coming that hasn't hit my radar. I'll need help raising clearing levels this late in a rally, so please consider a look at outright Feb '23-'24 contracts, or calendar spreads anchored by Feb '22 contracts. Those looking to play for extended gains in home prices might consider looking past shorter contracts to the Feb '23-'25 contracts, while those looking to hedge might focus on the strong gains baked into the Feb '22 contracts, or wait to see if today's enthusiasm spills over into longer contracts.
I'll continue to post 1x1 markets, but I'd encourage potential buyers/hedgers to share their trading axes, and let me work their inquires. Turns in market prices are often occasions when volume picks up, and prices react strongly. It will be much easier to buy/sell blocks of contracts when quotes are quiet and before a turn is obvious to others.
Feel free to DM me about the content in this blog, if you have any trading ideas, or just want to learn more about how home price index derivatives can be used in hedging strategies.
Thanks, John