I posted the blog below on Sept 21 to outline how readers might express a view on HPA for 2022 by using the CME Case Shiller calendar spread markets. To prompt further discussion, I've recently posted a 10x10 (10 lots bid v 10 lots offered) quote on the HCI (10-city index) calendar spread of -12.0/-8.0.
As illustrated in the table below, the bid of -12.0 would be the purchase of the G22 contract 12 points below where G23 would be sold, for a percentage difference of 4.0%. Going the other way, I'd sell G22 at a discount of 8 points (or 2.7%) to where I'd buy G23. As such, the -12.0/-8.0 quote translates into an HPA quote for HCI 2022 of +2.7%/ 4.0%. Anyone with strong views that Case Shiller HPA on the HCI index will be outside these ranges might consider taking one side of the trade.
As always, I'm more eager in getting other to weigh in with more size, and therefore to build liquidity, than I am trying to say "this is where the market is headed". However, I am willing to take risk on this 10x10 quote to get the discussion started.
Feel free to contact me if you have any questions about this blog, have any strong views on HPA gains for any of the regional cities, or would just like to learn more about how home price index derivatives might be used in hedging.
Thanks, John
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Sept 21, 2021
As 2021 starts drawing to a close, the debate about where home prices might go shifts into expectations of 2022. While there are still a number of large tailwinds (e.g. low mortgage rates, good demographics, and low inventory), there's a sense among many forecasters that prices may not climb as robustly going forward. The recent update of the Pulsenomics Survey on Home Prices (a required quarterly review of all following home price forecasts) illustrates the decline in expected HPA gains from 2021 to 2022.^1
The area highlighted in yellow shows how the forecasted change in the year-on-year difference in the Zillow HVI index is expected to decline from ~11% to ~6% from 2021 to 2022.
The question I pose (and the solution I offer) is how can one take a position in what the change in home price indices will be over 2022.
The table below shows outright and calendar spread markets for the Case Shiller 10-city index futures (traded on the CME) and for each of the ten regional indices. For example, the calendar spread market (between the Feb '22 and Feb '23 markets) is bid -15 and offered at -9. These quote reflect the level where (in the case of the bid side) someone could simultaneously buy the Feb '22 contract while selling the Feb '23 contract. Since the Feb '22 contract is quoted at a lower price than the Feb '23, the quote is negative 15 points (i.e. the front contract trades below the second). That would be equivalent to buying Feb '22 at 297 while selling Feb '23 at 312. ^2
However, points don't translate easily into HPA, and each regional contract trades at different prices, so eyeballing dollar spreads into HPA takes a second. To help, I've translated the -15 point bid into the percent gain for 2022. That is, in this calendar spread the buyer is buying Feb '22 and selling Feb '23 5.1% higher. Again the opposite is true for a sale, that is, the seller of Feb '22 would buy Feb '23 only 3.0% higher. (Note by contrast the trailing 12 month gains in the far right column).
With calendar spreads quoted for every region (traded by the CME) one can not only express a view on the gains for a "nationwide" index (i.e. the Case Shiller 10-city index), but also on each of the ten regional contracts.
As this is my first cut at Feb '22/Feb '23 calendar spreads in a while, I've started where -in general -the regional contracts all have similar implied YOY % gains, but with CHI and NYM somewhat weaker, and BOS and SDG somewhat stronger, (but all contracts fall into the 2-5+% range. Note that, as I've written before, these are levels where contracts clear and may not necessarily be indicative of expectations. That is, until the last year, longer-expiration contracts tended to clear at a discount to expectations, as there were fewer natural longs than natural shorts.
Further, recall that the CME contracts reference the Case Shiller NSA indices, so a comparison with expectations on a Zillow index (the basis of the Pulsenomics survey) may not be apples to apples.
Finally, this is my effort at both price discovery and to stir the pot on HPA discussions. I've posted 1x1 quotes (one lot bid v one lot offered) on quotes that imply 2.0-2.5% HPA differences between bid and offered levels. I'm happy to facilitate larger trades, or tighter spreads but both will be easier with your feedback.
Please feel free to provide feedback -either with quotes or emails here - as to your views on how the spreads should shake out. In particular, let me know if you have views on the strength of one region vs another.
I'm also open to teeing up OTC versions of this structure for other cities, but best to build some liquidity and tighter markets here first.
Thanks,
John
^1- I am a participant in the Pulsenomics survey
^2 -The offered side would be the reverse i.e. where someone would sell the front contract vs. buying the back contract at price 9 points higher.