A key debate in the home price forecasting world is where prices are headed for 2022. As I explained in a blog last month one format that hedgers can use to express a view is calendar spreads on S&P Case Shiller home price index futures, that are traded on the CME.
The table below shows the current market (-11.0 bid and -7.0 offer) and then converts these prices into year-on-year gains. That is the -11.0 bid (and bids are quoted the first contract versus the second) states the bidder's willingness to buy the HCI (10-city index) Feb '22 (G22) contract at a price 11 points below where they'd simultaneously sell the Feb '23 (G23) contract. Since the mid-market value of the G22 contract is 292.5, the 11 point premium would translate into a percentage difference of 3.8%.
The same process using the -7.0 point offer would translate into a 2.4% difference.
Since some people want to quote HPA debates as ranges - in percentage terms -I've flipped the bid and ask to show the 2.4%/ 3.8% percentage differences as the implied market.
Recall the CME lists February expiration contracts as those contracts settle in the index value covering the period ending two months earlier (so December). As such, the G22/G23 calendar quotes can serve as a way to debate the difference in index values between 2021 and 2022, or the HPA for 2022.
While outright price quotes are lower than 4-5 weeks ago, the calendar spread then was -12.0/-8.0 (or 2.7%/ 4.0%), so the "HPA Debate" levels haven't changed much.
I've posted a 5x5 (5 lots bid/ 5 offered) quote with the hope that users will contact me with inquiries, or post their interests in the market, to provide more depth to the market. I don't pretend to know whether Goldman Sach's bullish call, or those of the housing bears, are more likely. I just know that there are businesses that might benefit from being able to hedge exposures that may have sensitivity to changes in home prices (e.g. the value of servicing, brokerage activity or PMI), and am trying to expand that platform.
While I've shown the G22/G23 spread for the HCI (10-city) index contracts, the same approach can be used for other regions and for other expirations (e.g. G22 vs G24/G25/G26). That said, I've found that in thinly traded markets (such as this one), it's better to have eyeballs focused on a key benchmark (in this case the G22/G23 spread) rather than trying to create liquidity in dozens of regional contracts, across multiple expirations. I'm happy to respond to such inquiries, but the size will be lower and the bid/ask spread is likely to be wider.
Feel free to contact me if you have any questions about this blog, have trading/hedging ideas that you'd like to share, or just want to learn more about how home price index derivatives might be used in hedging strategies.
Thanks,
John