I've tried to stir the pot on recent blogs with ideas on relatively short expirations (Feb '21) as well as the longest expirations (Feb '25). However short contracts might be unduly influenced by the impact of distressed sales (from those who might be forced to sell), and may not be of much use to those who have the ability to hold. Further, many potential home buyers may have gone through job losses, or income reduction. It's unclear what the forbearance situation will be right up through the Election, and the banks may not have fully opened their lending platforms by then. Recall that lenders are digesting a tremendous refinancing wave, while employees, appraisers and closing attorneys are working from home.
On the other hand, the Feb 2025 contracts have been so thinly traded, and are so leveraged to changes in HPA, that bid/ask spreads might be too wide to offer trade-able insights. Given that, here's an attempt to focus on the G23 (Feb 2023) contracts.
The Feb 2023 contracts should cover a period post-COVID, and hopefully by then the markets will reflect whatever the "new normal" is. Banks will have figured out who they will lend to, will have had two years to refinance current owners, and all the lending protocols will be much more organized. Policies on appraisals (in areas that suffered distress) and VOE/VOI requirements and exceptions will be spelled out. Finally, I suspect that the co-investment firms will be re-ramping up as investors look toward appreciation from lower levels.
Net, I think that the G23 contracts might be a better hedge for prospective buyers and (non-distressed) sellers.
Given the above, I'm quoting the Feb 2023 (G23) contracts at higher prices than Feb 2021 (G21) contracts., but still at large (~10% discounts) to spot. The Millennial demand is not going away (unless you believe in a more dire post-COVID employment scenario) and I'm expecting that little will get bulit until 2021. My hope is that since the February 2023 contracts will be subject to less noise (e.g. distressed sales, employment issues) that the G23 contracts can get quoted at least as tight as G21.
I'm also still using IC spreads to generate brackets on where I'd quote regional contracts, but have already started bidding and offering some contracts inside levels generated by IC's, in response to user inquiries.
Finally, in sitting in-between Feb '21 and Feb '25 expirations, tight Feb '23 markets might help narrow bid/ask spreads in those two expirations via debates on calendar spreads.
Net, while I'd still like to encourage participation in the HCIG21 contract, my sense is that users could contribute even more by weighing in on where HCIG23 should clear.
Please feel free to contact me if you have any questions on this blog, Feb 2023 markets, or any aspect of hedging using home price index derivatives.
Thanks, John