There are two ways that readers can infer clearing levels on regional home price indices.
The first is the set of CME InterCity spread contracts where regional contracts (for both Feb 2023 and Feb 2024 expirations) are paired with the 10-city index contracts. (See blog for details on how to read IC Quotes). The graphs below show the bid and ask on each contract as a percent of the spot index. Recall that Case Shiller indices are a moving-average, lagged index, so that comparisons against spot will include a look back (in the case of today's spot), to activity from March through May. By contrast, quotes on the futures reflect the periods Oct-Dec 2022 and 2023, so unknown futures. Net, prices are lower for G23/G24 vs spot, as spot is backward looking, while G23/G24 include some element of expectations.
The top graph show the clearing levels for 22 contracts (two expirations for each of the ten regional contracts and the ten-city index), while the bottom graph translates Intercity Spread ("IC") quotes into how much each contract is priced to out-/under-perform the 10-city index (CUS, here) contract. For example, the BOSG24 (Feb 2024) is priced to slightly out-perform the G24 10-city index contract by 1-2%, while the SFR G24 contract is priced to under-perform by 2-3%. Net, users of the contracts can express views on regional v 10-city index moves without taking an explicit view on the direction, or level of the 10-city index futures.
An alternative approach, that also puts the debate into a longer-term context, and one that is useful to more cities, is an HPHF Ratio Agreement. Shown below are two RAs referencing the same Case Shiller indices used above, in this case for San Francisco (SFR) and Miami (MIA). Note how while the SFR ratio had increased over the last 6-8 years (consistent with SFR prices rising more than those of the 10-city index) HPHF quotes are at lower levels than the spot ratio. The declines in the ratio are consistent with the underperformance from the above graph.
By contrast, while the MIA ratio also increased over the same time (both gains coming at the expense of the CHI and NYM indices), the HPHF quotes for Feb 2023 and 2024 are higher, at levels consistent with the gains in the futures above.
Net, one can bet/hedge/invest in the performance of one city vs a more national index, but as with futures, some element of expectations is already baked into forward levels. That is, one can't take a view (here) that SFR will underperform the 10-city index as some amount of underperformance is already priced in. Similarly, one can't bet that Miami will outperform the 10-city index, as some element of out-performance is already priced in, to both the futures and the Ratio Agreements. One can have a view different than those posted here, or one can have a desire to hedge, and still use each product, even if some element of over-/under-performance is already priced in.
Key to this second illustration is that the same methodology can be used for the Top 50 cities using the Freddie Mac Home Price Indices. (See my recent blog for details.) I've recently posted examples for Austin, Cincinnati and Indianapolis on Twitter (and on Resources page here).
Please feel free to contact me if you'd like to see proposals on other cities, of if you have any questions about this blog.
Thanks, John