I've been posting quotes to the Nov 2020 (X20) contracts for the last five years, and, as they expire on Tuesday^1, I'm sad to see them go. The Nov '20 contracts are the last of the five-year forward contracts that expired on a November cycle. Recall that the CME replaced the November cycle with February, to have a benchmark set of contracts that referenced year-end values. While an entire set of February expirations was rolled out this year, none will have a data history for five years, for many years.
The graph of the HCI (10-city) index futures tells a story of expectations and changes in market clearing levels over several years. When the contract opened, it first closed about 30 points above spot levels, consistent with gains of about 6 points per year (or ~3%/ year). By contrast the Feb '25 contract -the current contract with the longest term to expiration - closed yesterday only 8 points above spot.^2
The contract spent most of the last five years priced between 225-240, a possible sign of few large changes in expectations, and a very narrow range that would have made option writing profitable (given the premiums during this period).
The contract history was marked by three ever-large dips, including a market selloff in Feb 2019, when California home sales slowed, and the dramatic selloff in March 2020, only eight months before expiration, during the first wave of COVID.
During the life of the contract, the spot index steadily inched higher (faster in the spring and summer, due to seasonal factors, and slower during the winter months).
After rebounding this summer to February levels, contract prices continued rising, in line with better than "expected" news on home prices.
This contract has served as an example of convergence in many blogs, and so, for the last time for this contract, note that the while the index released last month is 241.47, the Nov '20 contract is quoted 243.4/245.8 (a/o noon).^4 Since the contracts cash-settle on the index value released this month (on Tuesday morning at 9 AM - Eastern) the futures prices are consistent with expectations of the index falling between the bid and offer. That is, if someone "knows" that the index will be outside that range, they could hit the bid (if they know the index will be below that) or lift the offer (if they knew it was going to be higher).^3 As such, I describe index results that fall outside the expiring bid/ask spread as "surprises". I'm looking forward to Tuesday's numbers to see if there will be any surprise (across all 11 contracts).
Please feel free to contact me if you have any questions related to this blog, or if you have any questions related to the use of home price index derivatives in hedging home price risk.
Thanks, John
1-The last day of trading is Monday
2-I'd note that the mid-market value is 13 points above spot, and the offered level is 18 points> spot.
3-Alternatively, they could also post better bids or offers if they think the index will be above their bid, or below their offer.
4-There were trades after noon.