With Coronavirus having influenced many potential sellers to de-list their homes, and many buyers to take a wait-and-see attitude, the typical peak in home sales during spring will not be the case in 2020. However, many real estate pundits have pointed to a possible shift in that volume to the summer. After all, the thinking goes, by then the economy will have re-opened, people eager to sell will be allowing tours of their homes, and buyers looking to take advantage of historically low mortgage rates, might be more open to buying homes after only seeing them via social media products (that will be refined, and better accepted, after a few months use.) How then to express a view on the "Summer Selling Season of 2020"?
The CME Case Shiller November 2020 (X20) home price index contracts might be the answer. After all, the index values to be released in November reference July through September -the summer season. Note that as the Aug '20 contract references April through June, most of the activity in that measurement period has already occurred -today being June 15th -so there will be little unexpected activity. By contrast the July-September period is a blank slate ready to be impacted by summer buyers, the return or lapse of Coronavirus, the rebound or collapse of the stock market, and every other market feature that might impact home prices.
The table below details several aspects of the X20 contract.
First, the line highlighted in yellow has the Case Shiller index values from Nov 2019.
The section below there, with the header "Nov '20 contract..." shows Friday's bids, offers and mid-market levels. Bid/ask are somewhat wider than historical for a contract with five months to go, but my hope is that debates prompted by this blog will change that.
The line below the table shows the YOY difference between the Nov '19 (release date) index levels and the mid-market values for the X20 contract. Note that "implied HPA" for these contracts is only slightly above zero (and the wider bid/ask spreads on X20 contracts would give even these results a wider confidence range.) The range of implied HPAs runs from the stronger region of BOS, DEN, SDG and WDC to negative numbers in CHI and LAV.
The August '20 (Q20) contract quotes are shown below that (w/ much tighter bid/ask spreads), and then the difference between the mid-market values of the Aug and Nov contracts are tallied. Note that all Nov contract mid-market levels are at (at least ) a 1% discount to August. (BTW -If you care to express a view on Aug vs Nov prices, and don't want to take an outright view on price levels, you might consider calendar spreads, that are priced consistent with these discounts).
Recall, though that the CME contracts reference the non-seasonally adjusted Case Shiller indices. Given the typical strength of spring selling seasons, the Aug contract (measuring April-June) has -historically -had a stronger seasonal upside than any other quarter. I've shown my estimate of the difference between Nov and Aug seasonal factors in the line "Nov v Aug seasonal factor". Since Nov seasonal factors are lower, "all else being equal" one might expect lower prices in Nov vs Aug (in a zero HPA environment).
However, even with that difference in seasonal factors taken into account, the November mid-market contract values are priced consistent with a decline in seasonally adjusted prices from Aug to Nov.
The debate is, should this discount be the case for 2020, particularly if the spring buying season is pushed to the summer?
The transfer of buyers from spring to summer (i.e. Aug to Nov contract) might reduce the seasonal plus associated with the Aug contract, and increase the seasonal factor for November.
In addition, I've blogged (most recently on April 13th) about how (I believe) that forward contracts trade at a discount to expectations due to an imbalance between natural longs and those looking to hedge. Might that contribute somewhat to the Nov/Aug discount?
Finally, I'm not sure that a November expiration has occurred in the past with the current low levels of inventory. How might limited inventory (which is unlikely to change in the next few months -given limited construction and absence of foreclosures) trade off against the spike in unemployment claims? That is, are the potential buyers for 2020, the ones that have lost jobs, or even if so, have PPP programs given them comfort to move forward on a home purchase.
Net, it seems that there's tremendous room for debate about whether a summer selling season will take place in 2020, and if so (or not) what this impact will be on home prices. It seems that the CME Case Shiller X20 (Nov '20) contract is a good forum for engaging in that debate.
Please feel free to contact me if you have any questions about this blog, if you have trading ideas related to the Nov '20 contract, or if you have any questions related to using home price derivatives in hedging strategies.
Thanks, John