Prices of CME Case Shiller home price futures soared on Tuesday after the release of index values for April. As highlighted in the table below, mid-market levels on the Feb 2022 (G22) contracts increased by a minimum of 7-8 points for the HCI and CHI contracts, to 15 and 17 points for LAX and SFR. The magnitude of the market move was exacerbated by my reluctance to chase the market with higher bids, and a huge increase in offered prices, which combined to cause bid/ask spreads to widen dramatically (to levels not seen since before 2012). In effect, while I had spoken with a couple of potential hedgers in the past few weeks, there was (almost) no one willing to offer contracts yesterday (other than my wide quotes). Net, we have a classic "accordion" market.
Price discovery will be my primary goal for the next week, and I'd expect that most activity will first show in the HCI 10-city index contracts.
With such wide bid/ask spreads it doesn't make sense (for me) to post longer-dated regional quotes, until the Feb '22 and Feb '23 contract spreads compress to "reasonable" levels. As such, I've pulled orders on Feb '24 and longer regional contracts for the near future.
Further, I'd expect most activity will be in the front (August '21/Q21) contracts as the combination of strong momentum and historically strong seasonal patterns will generate bids from those looking to express a view on settlement. (After all, all of the activity that will impact the August 2021 contract will have taken place by today -June 30th- so pricing should be a function of evaluating past activity). The strength in August prices will likely continue to spill over into November (X21) contracts as July and August play out.
I'd expect that bid/ask spreads will compress (will only compress?) if those looking to hedge look for spots to sell. Such hedgers will clearly see better prices after yesterday's move.
Please feel free to contact me if you have any questions about this blog, if you have any trading ideas you'd like to discuss, or if you'd like to learn more about the use of home price index derivatives in hedging strategies.
Thanks, John