As we approach year-end, it's the time for home price forecasts for 2025. (See @NewsLambert or @ResidentialClub for Lance Lambert's compilation of survey forecasts.)
One often overlooked angle to both round out one's analysis, as well as to give users a tool to express their views, is the Calendar Spreads on the Case Shiller home price index futures that are traded on the CME.
To recall, the CME futures shown here have expirations of Feb 2025 (G25) and Feb 2026 (G26), and that the futures settle on the CS index values released on the last Tuesday of each month. Since the Case Shiller index looks back two months earlier each contract will settle on the index value for the period ending at year-end.
A calendar spread allows a user to simultaneously enter a long (or short) position in the front contract while entering a short (or long) position in the back contract at negotiated spreads. For example, the bidder on the G25/G26 HCI (10-city index) calendar spread is willing to buy the front contract (G26) 11.2 points below where they'd sell the back (G26) contract. A 350.3 mid-market price on the front contract, and a 361.5 price on the back contract (11.2 points higher) translates into a percentage difference of 3.2%. The seller at -8.6 points is willing to sell the front contract 8.6 points below where they'd buy the back contract. Again, the 350.3 mid-market of the front contract, and the implied 358.9 price on the back end translates into a percentage difference of 2.5%. (Note that the implied prices are inside the bid/ask quotes for each market). Logistically, at expiration of the G25 contract, the front contract will settle, and the user will be left with the G26 exposure (long or short) at the negotiated spread.
Net, there is a market for HPA on the Case Shiller 10-city index for 2025 of 2.5%-3.2% (in line with some of Lance's tally of forecasts). Importantly, that market can change continuously as: either a) other bid and offers are posted, or b) as people posting quotes change their mind. As such, the implied HPA gets updated in real-time as opposed to forecasts that might be stale after economic updates.
Note that market prices on all financial instruments (including these futures) may be influenced by a number of factors beyond expectations, to include positions of the users. That is, these quotes show levels where users (in this case, for full disclosure, my quotes for the sake of a full illustration) are willing to transfer risk, and therefore the prices may not completely overlap with expectations. However, since the contract prices must eventually converge to index values at expirations, and since users taking positions are putting capital at risk, market expectations need to be one factor in pricing clearing levels.
So, in addition to displaying implied annual percentage price changes, the CME contracts have the added value of allowing users to take a position (long or short) in the HPA debate).
Second, in addition to the calendar spreads on the 10-city index, there are calendars spreads on each of the ten component metro markets. The implied HPA differ across the metros with some markets consistent with higher price gains (e.g. NYM at 4.1-5.4%) while some are consistent with weaker growth in home prices (e.g. SFR at 1.2-2.5%). As is typical in the outright contracts, the quotes on the 10-city index are tighter (2.6 points bid/ask shown here) that for the metro contracts.
Third, while I've highlighted ways to express view on HPA for 2025, Calendar Spreads can be used for other combinations of expirations (e.g. Feb '26- Feb '27 for HPA in 2026).
Finally, while these quotes reflect YOY percentage changes on the Case Shiller 10-city index, there are ways that users can take exposure to other indices with some OTC hedges offered by my Home Price Hedging Fund ("HPHF").
Please feel free to contact me if you have any questions, any interest in acting on these indications
Thanks,
John
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