The CME Case Shiller home price index futures should be on the radar of anyone looking to weigh in on the debate as to where home prices are headed in 2020.
Since the February indices reference activity ending two months earlier, the February contracts settle on year-end index values. This makes these contracts useful for seeing where users are willing to buy/sell exposure to future home price indices. Of particular interest are the Feb '20/'21 calendar spread markets. Recall that calendar spreads allow a user to simultaneously buy one contract while selling the other at a pre-negotiated premium. Since spreads are quoted the front contract vs. the back, if prices on more distant contracts are higher, then the spread is shown as a negative number. That is someone buying a calendar spread is willing to buy the Feb '20 contract at some discount to the Feb '21 contract. The price difference, when divided by the price on the front contract can be converted into a percentage difference.
As such, the BOS G20/G21 quote of -4.4/-3.6 can be translated into one party being willing to buy Feb '20 1.9% below where they'll sell Feb '21. (The seller is offering the spread at -3.6 points, or 1.6% premium of Feb '21 over Feb '20).
The percentage differences are shown for all 11 regional calendar spreads (one -HCI -for the 10-city and one for each of the ten regional components of that index). The BOS (Boston), LAV (Las Vegas) and WDC (Washington DC) contracts are priced at levels consistent with the largest gains for 2020, while the CHI (Chicago), LAX (Los Angeles), and NYM (New York) regions are priced for the lowest gains.
The calendar spreads are useful in that one can express a view on Case Shiller HPA for 2020, without waiting for the February release, to see the 2019 year-end index values.
I've noted before that I believe that forward contracts clear at a discount to expectations (more natural sellers than natural longs). As such, long positions in calendar spreads (i.e. short the front contract -which is converging toward the index value at expiration versus long the back contract), may be way to express a view on systemic discounts of forward contracts. Those who are bullish on home prices for 2020, would get a win-win if contract prices are below expectations AND if expectations rise.
I've posted bid/ask spreads of 0.8 points on all 11 spreads to try and prompt debate about (and trading of) the spreads. I've got some personal interest in rolling positions that expire in Feb '20, and so would have an axe to buy/sell multiple contracts for selected regions. (For example, I'd buy 20 of the NYM Feb '20/'21 spread.)
Please feel free to contact me if you have any questions about this blog, or anything related to using home price index derivatives.
Thanks, John