CME Markets and 2019/ 2020 Forecasts for Case Shiller home price indices

The CME S&P Case Shiller home price index contracts might be of use for anyone looking to see how clearing levels on contracts might translate into, or contrast with, home price index forecasts for 2019 and 2020. Further, the Feb 2020 markets and the Feb '20/'21 calendar spread markets, may be ways to express a view on forward HPA. (Note that these are markets referencing the S&P Case Shiller home price indices. Market clearing levels for other indices on the same regions, may differ.)

For 2019 "forecasts" comparing the Feb 2020 (G20) contract against the Dec 2018 index levels seems appropriate as the Feb '20 contract settles on index released in Feb 2020, which is the index through Dec 2019. As such, the first graph below takes the information in the left side of the table below, i.e. Feb '20 contract bids, offers and mid-market levels and coverts them to percentage differences versus the Dec. 2018 Case Shiller index For example, the BOSG20 contract is bid 225.4 or 4.7% above the 215.3 Dec 2018 index. Converting into percentage differences has the advantage of standardizing differences across contracts with different prices.

With almost 2/3rds of 2019 in the books (i.e. the upcoming October release will be on the August index), regional winners and under-performers stand out more clearly in the graph below (to the left). BOS (Boston) and SDG (San Diego) are priced as the best performing markets for 2019, while NYM (New York) is far behind at about break-even.

For 2020 forecasts, one could either do the same exercise with the G21 contracts, or look at the calendar spread markets. (Recall that calendar spreads are where one can simultaneously buy one contracts while selling another at a predetermined spread. )

The right side of the above table takes calendar spread quotes and converts price differences into implied percent gains. So, for example, the quote for the BOS Calendar spreads shows someone willing to sell the front contract (G20)/ while buying the back contract (G21) 3.4 points higher. (The convention is to show the front contract relative to the back, hence the negative numbers). Given a mid-market value of 226.4 on Feb '20 contract, that would translate into a bid of 229.8 on the G21 contract. By contrast, the seller of the calendar spread wants to do the reverse but at 5.0 points (i.e. selling the G21 contract 5.0 points above where they'd buy the G20 contract).

Since calendar spread contracts result in zero net position (long one contract/short another) calendar spread bid/ask spreads tend to be tighter than out-right markets (and I'd be willing to take larger exposures).

Finally, much like the above exercise, one can translate calendar spreads into percentage gains.

The graph to the right shows the result of that exercise for 2020. Note that the implied gains for 2020 are well below the implied gains for 2019, and, for now, have converged to a tight range of about 1.5-2.0%. Many regional markets have calendar spread levels that are consistent with HPA for 2020 of <1.5%. This may be either because market participants expect lower gains, and/or that (IMHO) longer-dated contracts may tend to trade at a discount to expectations. (i.e. The convergence that pulls contract prices to expectations on forward indices is still over a year away).

Bid/ask spreads on the Feb '20 contracts average 2.0 points, while Feb '20/'21 calendar spreads average 1.2 points. I'd be open to facilitating any inquiries in either sets of markets.

Feel free to contact me if you have any questions about this blog, or any aspect of hedging home price indices.

Thanks, John