Looking Forward (as opposed to focus on data releases)

It's been a busy week for home price measures. Both Case Shiller and FHFA indices were released, and there has been much ink spilled on how one might interpret home price purchases from the past in forming opinions on the future. While home prices have tended to trend, many markets have reversed on concerns of the corona-virus. With stocks, interest rates and volatility completely changed from last week, might the outlook for home prices also change? Stocks, bonds and volatility are continually updated in real time. How might one go about figuring out how home prices might react?

Here's a simple product to add to your arsenal of forecasting tools: look to the only set of publicly traded U. S. home price index contracts to see where risk clears.

The attached illustration shows the markets for the CME Case Shiller 10-city home price index contracts. There are ten expirations per contract (although I'm only showing eight) that run out from May '21 to Feb '25. Each contract will settle on the Case Shiller index value released in the expiration month. Since the February release references home price activity through the prior Dec. 31, the contracts reference year-end values.

Contracts and index values will converge over time  and cash-settle at maturity.

Importantly, contract prices can also be updated continually, reflecting changes to levels where longs and shorts will take exposure. (Note: my sense is that contracts may clear at discounts to expectations . That is, I see more natural sellers than natural longs, so speculators (that make up the difference) may be getting a favorable risk/reward).

As such, you can incorporate real-time, market-based information, into your projections for forward home price indices.

I'd note that the CME home price futures have had an upward sloping curve almost continuously since 2013. However the curve has gotten flatter over the years (lower HPA) and has flattened further over the last few days.

Bid/ask spreads have tended to widen with increases in volatility and this week has been no exception. While the ~1-year Feb '21 contract has a bid/ask of 1.2 points (which is actually tight with a year to run), the bid/ask on the longest-dated contract has widened >7.

The same illustrations can be created (upon request) for any of the ten regional contracts. As a general rule, bid/asks in the more active regional contracts approach the bid/ask of the 10-city index contracts, while the less-liquid regional contracts trade wider.

Note also, that many of these quotes are 1x1 (i.e. one lot bid v one lot offered). Please contact me if you like to discuss a trade for a larger size, or if you have a particular trading idea you'd like to explore.

Thanks, John