After a detour to some other work commitments, I did a wholesale update to the quotes I post over the last few days. The result is the table and graph below. The graph highlights the change in contract closing prices between Dec 29th, 2020 (in green) and today's (April 20th) quotes (in purple). The upward shift between the two curves highlights that the changes for the contracts expiring in 2021 were almost as large as for the longer-dated contracts ( e.g. Feb 2024-25). For example (not shown) the close on the HCIQ21 (August 2021) has risen from 256.0 to 262.4, a gain of 6.4 points, while the close on the HCIG24 (February 2024) contract is up from 259.4 to 267.4, a gain of 8 points.
Note that all of today's quotes have been determined (using the CME rule of a) last trade, b) a higher bid, or c) a lower offer) by recent bids. As such, any trades done above the bid side will raise closes even more.
I can't say whether the gains have more to do with quotes catching up to sentiment, or sentiment rising above year-end levels, but given that the action during 2021 has all been "offers lifted" I suspect a combination of the two.
I'd observe that this upward shift in the forward price curve is consistent with enthusiasm for future gains being limited to the first few contracts (e.g. Aug, Nov '21, Feb '22). Beyond that the year-on-year price differences are generally about the same as they were at year-end. My theory for why this might be has two components. First, as indices are updated (e.g. in Jan, Feb and March this year) and as the updates were above prior contract prices (see small segment where indices - in black -are above contract prices from Dec 2020) there is upward pressure on short-expiration contracts as the convergence to the updated index levels becomes stronger as expiration approaches. Second, the higher the curve shifts higher, the louder talk of a housing bubble enters consideration as to where longer-dated contracts should clear. That is, those that at one point might have considered selling Feb '24 at 260, might be even more interested if they can get a hedge off at 270, and would still be ahead if they wait to see prices fall and sell at 265. On the other hand, buyers who might have wanted to buy longer contracts at any point in the past, fear that they missed a great opportunity, and have become less bullish. Net, sellers in longer-dated contracts see prices coming their way, while longs have a harder time rationalizing after prices have already risen so much. The imbalance weighs on the clearing levels.
Finally, while I've shown the results for the HCI/10-city index contract here, I'm happy to modify this template for any of the ten regional contracts.
That all said, my interest is not in explaining where price might go, but to have readers offer their own suggestions, and ideally, to back up their views with bids and offers.
Feel free to contact me to discuss such ideas, to have any questions addressed, or to learn other ways of using home price index derivatives in hedging strategies.
Thanks,
John