I posted a recap of activity in the CME Case Shiller home price index contracts for November. You can find it on the Resources page or link here.
Key highlights include:
–During November 23 lots traded across 6 regions and 6 expirations.
–Prices were slightly lower during the month but then rallied when the CS indices were released on Tuesday Nov. 30.
–Trading remains concentrated in the front 10-cityindex contracts. 39% of this month’s trades and 34% of the trades in the last year involved the HCI (10-city index contracts).
-70% of this month’s trades were in the front two contracts (X21 and G22).
-The average time to expiration of open contracts continues to hover at < 0.5 years. I have further ideas to increase further activity in the longer HCI (10-city) contracts. (DM to discuss).
–I continued my effort to re-price the G23 contracts, making that the new benchmark contract. Further steepness (between G22/G23) emerged during the month but the implied HPA for 2022 is still <5%.
–With the expiration of Nov‘21, the number of expirations remains at nine. Further, I see no reason to unilaterally post aggressive quotes in G25-G27 (new contract), and my focus is going to be on the G22, G23 and G24 expirations.
–FYI- will be travelling Dec 24-Jan 1, so expect fewer quotes during that timeframe. Any help to keep markets liquid during that time (and to react to Dec CS #'s) would be appreciated.
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The area that I'd like steer readers to, both as the most liquid part of this market, as well as the best way to participate in the hottest debate, is the calendar spreads between G22 and G23, and/or G23 vs. G24. It's the best, most public way I can think of for people to take a position on where home prices will grow for 2022.
The table below has Friday's quotes for the the HCI contract and I've added the calendar spread quotes (in orange and green).^1 The calendar spread bids and offers can be quickly translated into implied YOY gains in the Case Shlller index for 2022.^2 For example, the -14.0 bid is the level that someone (me) will buy the G22 contract vs. selling the G23 contract. That equates to a 4.76% premium. Alternatively, the seller is willing to sell G22 and buy G23 11 points higher, for an implied YOY gain of 3.74%.
As such the 2022 HPA market can be inferred to be buy the forward +3.75%vs. sell the forward at +4.76%. Someone thinking, or wanting to express the view that the HCI 10-city index will rise > 5%, might consider selling the calendar spread (i.e. buying the back contract) while someone thinking that home prices will rise < 3% might consider buying the contracts (selling the second leg).
My sense is that this market might lend itself to those looking to express view 2022 HPA as the quotes are relatively tight (i.e. ~1% bid/ask HPA) and not likely to move dramatically absent a big market move. Recall that each lot has notional value of $250 *Price, or about $75,000/ lot. As such, someone who wants to express a view on $5mm could bid/offer ~66 lots.
While users might have issues with liquidity, my sense is that the appearance of 50-lot bids and offers in calendar spreads might be a game-changer to liquidity in the underlying contracts. I could use your help.
Please feel free to contact me if you have any questions about this blog, want to get involved in any of the Feb/Feb calendar spreads, or just would like to learn more about how home price index derivatives can be used in hedging strategies.
Thanks, John
^1 As a reminder, in entering a calendar spread, one simultaneously buys (or sells the first leg) while selling (buying) the back leg, at a negotiated price.
^2 Recall that the February contracts settle on the indices released that month, which reference activity ending two months earlier (in Dec.). As such, the G22/G23 calendar spread will settle on the difference between the Dec 2021 index (released Feb 2022) and the Dec 2022 index (released on Feb 20230.