The Nov 2022 CME Case Shiller home price index contracts will stop trading at 3 PM (Eastern) on Monday, and will settle on the index values published Tuesday morning, Nov. 30, at 9 AM. (Note that the other eight expirations will trade until 4 PM on Monday).
Since the index value for settlement covers the period from July through September, there has been no "new news" that might impact the index value for several weeks. All of the closings that go into the index calculation happened many weeks ago. (In fact the 10-city index contract was quoted 312.2/313.0 as long ago as Oct 1st.)
Also, since the contracts expire on the index value, one should expect (in theory) that the bid/ask quotes on the Nov 2022 (X22) contract should bracket expectations for the index updates. After all, if (for example), someone expects the NSA 10-city index to be 314, they could buy a contract at 313, and pocket $250 per point per contract. Conversely, if someone believes that the index will be 310, they could hit the 311 bid and pocket the same $250 per point.
This arbitrage is why these contracts are said to converge toward the expected index result as the number of trading days to settlement narrows. (Note that the 10-city index, which tends to have more followers, and is the weighted average of the ten regions, tends to have the narrowest bid/ask spread (both for Nov 2022 and all other expirations), while the contracts that have few followers, or where the noise about home prices falling has been loudest (e.g. SFR) tends to have wider bid/ask spreads. Further, while I might want to be "on the bid" or "on the offer" and compete with others to bid/offer quotes in some regions (e.g. there have been others noodling about in the MIA contract), I feel no urgency to trade against myself to narrow the bid/ask where I am the only one quoting contracts.
"If" the Tuesday index numbers happen to land on top of the mid price for each contract, the numbers will provide support to two different stories (as evidenced by the table at the bottom of the illustration above).
The bulls, and those who's industries thrive on "good" housing stories, will note that year-on-year gains (the Nov '21/Nov '22 lines in the table above and green line in the graph below) are still strong, and in some cases (e.g. LAV, MIA) reflect double-digit growth.
The bears, or the housing bubble proponents, will look at the same numbers and see that Case Shiller index values have already fallen more than 10% for some regions from the index values released in Aug. 2022 (e.g. SFR). They might further point out that since Case Shiller is a moving average (and with a two-month lag), home prices are probably down more than that.
Further, if they are fans of the CME futures, they note that contracts that expire in Feb 2023 are below Nov '22 prices, that YOY results will turn negative by the expiration of the Feb 2023 contract (see red line with arrow in graph below).
Net, the CME Case Shiller contracts provide both bulls and bears material to support their stories.
As someone who's making market on forward prices, it's clear that index values are headed lower. The debate and opportunities to express views via trades are endless.
Will home prices fall?
By how much?
By how much for each region?
When will they stop falling?
Will there be a recovery in 2024, or 2025 or 2026, and what does it look like?
How much of a difference is there between forecasts and contract clearing levels?
The above graph is a snapshot of quotes at the moment, but subject to change as people trade, or as fundamentals change.
Feel free to weigh in with your own views, either with comments to the posts, or bids and offers, or just to contact me with questions or inquiries.
Thanks,
John