The shortcomings of (backward-looking) YOY analysis on home price indices. Why CME Futures might be a better forecasting tool.

I had previously blogged about the downside of relying on backward looking year-on-year analysis. (see April 2019 blog. ) Now Wolf Richter has made the same point on his Wall Report platform (which was re-posted on Naked Capitalism by Yves Smith).

As a lengthy comment to these posts, I agree with Mr. Richter's point - i.e. that you can't take comparisons between a two-month lagged, three-month moving average, compare it to the same index from a year ago, and expect to have a strong basis for figuring out what lies ahead -particularly when markets may be turning. I encourage readers (and reporters) to do a deeper dive into his report to learn how the spot (or YOY change in spot) Case Shiller index values may be used, and when they shouldn't.

What I'd add to his recap is that the key element he highlights - i.e. the backward-looking feature of the Case Shiller indices -might be somewhat addressed by viewing the CME Case Shiller home price index futures.

The table below shows July 2nd prices for selected CME Case Shiller HCI (10-city) home price index contracts with expirations ranging from Aug 2020 to Feb 2025. Since the contracts will settle on the Case Shiller index value released in the expiration month, some element of clearing prices-particularly on shorter contracts - should reflect expectations of where the index might be when the contract expires. (That said, traders can buy/sell for many reasons, and I've written before -see May 1 blog -that I believe that CME futures might clear at a discount to expectations). Since users in this contract are putting their money behind where they expect an index to be at some future point, the contracts might also have some value over (or compliment) those offering an opinion.

Current prices are consistent both with gains in the index through the summer, as well as a pause/dip in early 2021 (so both bulls and bears can be right -depending on their time frame.)

Note that, given the mid-market values of the Aug '20, Nov '20 and Feb '21 contracts (not shown), contracts are currently priced such that there won't be a negative YOY value until the ~Jan/Feb 2021 index release. That is, at today's levels, waiting for a negative YOY index value to change one's views on the direction of home prices, might not take place until two months after Election Day!

Further, YOY reviews tend to be infrequent observations as the Case Shiller index values are only updated monthly. The graph below contrasts the difference between the index releases, in red, with the daily closes on the CME Feb '21 Case Shiller home price futures (the blue line). I ask, not too rhetorically, which is a better tool for discerning sentiment, both across time, and day to day? A viewer of the contracts can see changes on where risk might clear. (To help, I try to update my sense of CME clearing prices each week on by website: . In addition, there are numerous vendors (E.g. EQuotes, Bloomberg, and various trading platforms) that post live prices. )

Net, I agree with Mr. Richter that the press needs to reduce it's focus on YOY changes in the Case Shiller index, but would add that they can derive some sense of changes in expectations (and the level that home price index risk will clear), by adding CME Case Shiller home price index futures to their analysis packages.

Please feel free to contact me if you have any questions about this blog, any desire to add/reduce home price index risk, or any questions on the broader topic of using home price index derivatives in hedging strategies.

Thanks, John