Market Changes since Aug 31

Closes on the CME Case Shiller home price index futures have been grinding higher since Labor Day. The graph below shows the closes as of Aug 31 (in red), compared to yesterday's closes (in purple). The differences between the two are presented in the green bar graph (which references the right axis).

I'd highlight three notions:

1) The forward curve continues to flatten. Most of this has been changes to my quotes, but it seems consistent with the theme that the housing markets have remained more robust than previously expected. Since the intermediate contracts (Aug '21-Feb '23) had been the most discounted (to spot) they have tended to move up the most. The introduction of a vaccine in Q1 (?!?) should also translate into a more open economy, and possibly increased interest in homebuying in Spring 2021 (should buyers meet underwriting needs at that time). Home Price fundamentals (e.g. low inventory, low mortgage rates, increased wealth as stock market rallies) remain strong.  Uncertainty (e.g. who will be the President, whether a vaccine will be created, COVID relief, and rules about forbearance) should all be more clarified in the next 30-45 days. All seem to support home prices, and is reflected in higher prices on stocks related to home prices (e.g. Z, RWT, RKT, ITB).^1

2) Recall that these are closes (subject to the CME 3-part rule of: last trade, higher bid, or lower offer). As such, when there is little trading (and there's been none yet in October), and when the market is rising, only higher bids will typically increase the close. For example, the HCI (10-city) Feb '23 contract was quoted 238.8/245.4 last night -hence the 238.8 close. Bids are already higher this morning (239.2 at the moment) which if there's no further activity, would increase closes again tonight. (Note that closes are tallied at 3 PM Eastern, even though the contracts trade until 4PM).

3) I would appreciate some feedback (i.e. other traders weighing in with quotes) to foster price discovery, and to keep bid/ask spreads from widening too much (which tends to happen when prices move to a new level on limited trading). There is very little open interest (OI) beyond Nov '21 (X21), so pushing bids up (or offers lower) will impact only a few contracts. Also, while there's been keen interest in how the front contracts will react to recent housing activity, I believe that the primary role of these contracts should be to hedge forward uncertainty. As such, I've started to focus more on the G22 (Feb 2022) expirations, and will be citing those as the benchmark expiration in describing market updates.

I've been trying to use intercity spreads to have changes to 10-city contracts spill over into regional contracts. That said, in the absence of a trade axe from a user, the 10-city contract is likely to have the tightest bid/ask until prices stop moving.

Feel free to contact me if you have any questions about this blog, have any trading ideas that you'd like to discuss, or would like to learn more about the use of home price index derivatives in hedging strategies.

Thanks,

John

1-I have positions in many CME Case Shiller contracts as well as the stocks named.