Here's two new templates for somewhat stale quotes on the CME Case Shiller home price index contracts. (See pricing vendors -e.g. Bloomberg, EQuotes, for live prices).
*** Note that tables have been updated for Feb 14*****
I've highlighted the February expiration cycle contracts (excluding Feb '28 for now) since those contracts will settle on year-end Case Shiller indices. (Recall that the Feb CS release is for activity from Oct-Dec). As such, the contracts lend them to debates about how home prices might perform during a certain calendar year. (I've also been quoting the "other" expirations -i.e. May, Aug, and Nov 2023, and Feb 2028-but would prefer that users focus any hedging efforts on the Feb expiration contracts to build OI, and to reduce bid/ask spreads.)
The first table includes last year end closes (Dec 2021) to allow for implied HPA for 2022, the spot index, the mid-level for the contract vs the earlier mid value (to establish year-on-year percentage differences), the dollar bid/ask spread in points, and then the bid/ask spread in percentages. This last element is necessary as the contracts trade at vastly different levels (e.g. Miami at 397 and Chicago at 182).
The second table aggregates the same YOY percent price differences (labeled "implied 1-Year HPA"), and the bid/ask spread in points and percentage terms, but across expirations and regions to make comparisons easier.
Some key observations include:
* There will be quite the range of YOY changes for 2022 if Feb 2023 (G23) mid-market quotes are close to the CS index values to be released on Feb 28. Miami will be the clear "winner" while SFR is already priced for negative HPA for 2022.
* All ten regional contracts (as well and the HCI 10-city index) are priced consistent with declines in index values for 2023. (See the G24 line, under Implied 1- year HPA). There is somewhat of a reversion to the mean with a range of clearing levels from -9.0% (SFR) to -3.0% (MIA). Users who contemplate gains in these Case Shiller indices can express such a view by selling G23/G24 contracts (i.e. getting short the index level for Dec 2022, and long the contract that settles on the Dec 2023 index). Such trades are available for every YOY quote, or even multi-year differences (e.g. the G24/G27 calendar spread is a way to express a view on the changes in the index between year-end 2023 and year-end 2026). Many of the posted quotes are a function of such calendar spreads. As such, users can express a view on the direction of forward prices without necessarily picking a forward level.
* The $ and % bid/ask spread for HCI is much tighter than that for any of the ten regional contracts across all expirations. Users looking to express a view on national home prices, or even on a city where home price changes have been highly correlated with national prices, might consider expressing their views in the Feb cycle HCI contracts.
* Bid/asks spreads widen as expirations lengthen given both the increase in uncertainty about the future, and the possibility of staying in the position longer (if looking to cash settle at expiration).
* I'd have users consider bid/ask spreads for the longer contracts (i.e. Feb 2026/ 2027) as either invitations to debate, or have them appreciate that they are useful to having closes update more frequently, and to fill out forward graphs. (Also, now that I'm reporting "stale" quotes, I have an incentive to tighten these up).
* Note that for some regions, users can buy futures at prices lower than spot or even Dec 2021 levels. The SFRG26-27 contracts are the most notable in this regard as users can "lock in" Dec 2021 price level exposure 3-4 years forward.
* In addition to calendar spreads, many of the longer expiration quotes are a function of InterCity spread quotes. That is, users can express a view on how one index might perform vs the 10-city index for a given expiration (the most frequently quoted IC trades), or even how one city might do against another. IC spreads might be particularly useful for regional pairs (e.g. NYM v BOS) or SDG v LAX) as one can express relative value views without taking an explicit view on the absolute level of forward index values.^1 For example, contracts are priced for CHI and MIA to outperform the 10-city index between Feb 2023 and Feb 2025, while LAX, SFR and WDC are priced to underperform. (Note that I'm open to proposals to users for relative performance agreements on other cities not referenced by CME contracts (e.g. Dallas, Phoenix, Tampa, Houston, Minneapolis). Feel free to contact me here to discuss IC quotes.
* There are different signs for YOY price differences for 2024 (the G25 line) consistent with the notion that home price forecasts for when the market bottoms are unclear. Some markets (e.g. MIA, NYM) are priced for gains during 2024, while others (e.g. SFR, BOS) are priced for slight declines.
* All markets are priced consistent with home price indices rising in 2025 and beyond.
* It's important to recall that prices quoted may have some element of forward expectations (as contracts have to converge to the index value at expiration) but that many other factors might drive prices away from "expected" values. For example, users (to include me) may be short (or long) looking to unwind, or have a seller/buyer in hand who is working an order at some price level. As a trader, I have long believed that there are opportunities when other users have an artificial desires to buy/sell.
* (Not shown) contract prices have bounced off the lows from last month. For example, HCIG24 traded as low as 272 and is now quoted 288/294.
I'm going to try to update the tables on a bi-weekly basis, but feel free to contact me if you'd like something in-between.
Thanks,
John
Footnotes:
^1 Note that since the contract have different notional values ($250/point * price) one may need to weight exposure to one region with a different number of contracts for another. I'd be happy to help users get closer to neutral on such strategies.