This might be a belated blog but it's a useful example/reminder of how home price contract prices converge to index updates. This is important as, while I believe that the markets have reentered a phase where forward contracts clear below expectations, in time, the contract prices will converge to the index.
To emphasize, IMHO contract prices are where risk clears, and not necessarily where home price expectations get resolved. This is particularly true in a thinly traded contract where there are few people to take positions against the trend (and this week everyone seems to be selling). A large buyer/ seller (e.g. beyond my personal willingness to take the other side) can push prices even further (See Spring 2020 during Covid scare).
However, those considering possible long positions should appreciate that a) they might be entering positions at levels below expectations, but b) they will eventually settle at the index level. Thus, "if" eventual index updates come in near expectations, longs may have a positive risk/reward.
This is not to say that sellers shouldn't sell. Selling/hedging allows homeowners to reduce perceived risk, and/or to try and lock in profits on home price appreciation accrued over the last few years. No one would suggest that life, boat, or car insurance clears at "fair value", yet millions enter into such financial hedges as it improves personal utility. Until other home price hedging products evolve (and they are/ DM me) users may benefit by hedging (here) with whatever products are available.
With that as the preamble, here's the results of the May 31st Case Shiller index updates:
I'd highlight that for 9 of the 11 contracts the index published in May was within the bid/ask spread of the CME contract prices from just before closing. (I was traveling to Canada for my step-daughter's wedding so I may not have the 3PM prices from Friday May 27, the last day of trading). The 9 of 11 result is not perfect, but is higher than typical past quarters. That could mean that the market prices were aligned with expectations. Of course, this expiration cycle was marked by unusually large bid/ask spreads as a) sentiment has been quickly turning negative, and b) I widened bid/ask spreads while away. (If anything, this expiration also shows the opportunity for others to get involved in making markets).
Both MIA and WDC index results were solidly above the expiring May '22 contract quotes, and this "out-performance" has translated into higher quotes on the Aug '22 contracts.
Separately, I'm no longer posting monthly recaps (aiming instead for quarterly) but I'd note that 49 lots traded in May. Other than Feb/Mar 2020 when a) the CME changed from a Nov to Feb expiration cycle (causing people to shift positions), b) Covid roiled all markets, and c) an FCM raised margins 10x (causing those with position there to either trade out or transfer/trade to another broker) this is the highest monthly total since May 2014.
My sense is that market activity picks up a) when sentiment changes, and b) when people fear a move that will be big enough to offset basis risk fears. Given the inquiries I've received over the last few weeks, I suspect we've entered such a turn.
During May, prices were very volatile. As an example, the HCIG24 contract traded at 342 but was offered at 327 at month-end. The California markets fell even more.
I'll elaborate more about specific markets (although as generalization, selling is concentrated in California) in a future blogs to get this one out and to be more detailed after the markets are opened and I'm sitting at my desk.
My sense is that for anyone looking for outright moves that they consider first using the 10-city index contracts, and then later rolling into more specific regional exposure. That is, during turns markets become thinner, so steering most of the inquiries to the HCI/CUS contracts will improve the likelihood of finding another side. I have traded (and will continue to quote) LAX, SFR and SDG but if a macro short is your desire, realize that a) the California indices make up ~36% of the 10-city index (by weight), and that the 10-city index contracts are where any limited buying is more likely to show.
Further, I have specific inquires on non 10-city index cities (e.g. Phoenix, Raleigh) that I'm working on, and would love to pursue ratio agreements on those and others.
Finally, many inquiries are for puts, and put writers are needed. Recall that the CME stopped clearing puts but puts can be arranged for OTC agreements on the HPHF platform. Further, note that put payouts are capped (with a floor value) so that writers are not subject to prices falling to zero.
Thanks for now. More later this week, John