CME Futures are higher after Tuesday's release of Case Shiller indices. The updated numbers were higher than the closing bid/ask range on 8 of the 10 regional contracts (see below). In some cases (e.g. LAX, SFR and WDC) index updates were far above the asked side of the expiring Nov '22 (X22) contract. This meant that there were trading opportunities up until contract expiration. In fact, someone bought a SFRX22 @ 343.0 on Monday, netting >5 points or $1250/ contract. Readers might want to revisit this opportunity when the Feb '23 contracts mature.
The pace of the index declines have caused me to reconsider both my approach in forecasting numbers, as well as my sense of possible magnitude of a sell-off in home prices. It's clear from Home Sales, as well as the Case Shiller Pair Count statistics released yesterday (see graph below of "pairs" in the San Diego index), that the volume of home trades has fallen, and may continue to fall as seasonal factors and higher mortgage rates kick in. However, the impact on prices has been less that contract prices in mid-November had implied.
A change in the pace of a possible decline in home prices was reflected in prices of longer-dated contracts. The table below shows Before/After prices in the Feb 2024 expirations. Quotes on the regions where index values surprised to the upside (see above, LAX, SRR and WDC) saw the biggest upward moves (as measured by change in mid-market values). Only BOS saw a nominal price decline. (Note that I've switched my benchmark/reporting contract from Feb 2023 to Feb 2024, as Feb 2023 index values reflect activity from Oct to December, and as such are getting somewhat baked in. The Feb 2024 (G24) contracts have been quoted on wider bid/ask spreads (see comparison vs Nov 2022). It may take a few days for bid/ask spreads to contract to Monday's levels. The biggest help would be for users to participate in the HCIG24 contract, as prices there get translated into quotes on many of the regional contracts via InterCity Spreads.
There were two trades on Tuesday (following the three on Monday).
Finally, with the expiration of the Nov '22 (X22) contract, the CME opened trading in the Feb 2028 contracts. If history is a guide, there may be limited trading there for a while (FYI -open interest in G26/G27 is two lots) until traders express stronger views on: how far might home prices fall, when will they bottom, and what shape will a recovery take. As noted above, I'm coming around to the notion the bottom in contract prices was last month.
Please feel free to contact me if you have any questions on this blog, have any exposures (long or short) that you'd like to hedge, or if you'd just like to learn more about how home price index derivatives might be used in hedging strategies.
Thanks, John