What a difference a month makes! (Feb 21 v Mar 20)

I've compiled a template for comparing price changes for the CME 10-city. and the ten regional CME Case Shiller home price index contracts. These graphs show the changes from Feb 21 to Mar 20. (I picked Feb 21, as it's both a month ago, it was just before markets collapsed, and it is the earliest date that I have a full set of quotes for the newly launched Feb expirations.)

In each graph the black line is the historical Case Shiller regional index, the green line was the contract closing prices on Feb 21, the purple line is the close from Thursday Mar 19, the blue x's are the bids, and the red 's are the offered prices-both from about 2 PM on Friday, March 20th.

Note that since the CME protocol for calculating "Close" is the last trade, or a subsequent lower offer, or higher bid, in thinly traded contracts the last offer often effectively sets the closing price. As such, while closing prices have fallen, the actual impact may be bigger as it's not known where between the bid and offer, the next trade may take place.

Further, with higher uncertainty, bid/ask spreads tend to widen as time-to-expiration expands. For example, I noted in my Jan recap that the X20 bid/ask spread at month-end averaged 1.8 points across all regions, and for X22, the bid/ask spread averaged 2.8 points. On Friday, the G21 contract^2 bid/ask were just < 5 points, and the G23 contract bid/asked averaged 10 points.^1

Forward curves have dropped dramatically with all but four G21 (Feb 2021) regional contracts posting offers below current spot levels. (See website for daily updates on where I think Feb '21 contracts will clear, and other contract items.) My sense is that CME quotes (and proposed HPHF OTC agreements) are priced consistent with the notion  that those parts of the country that are more economically dependent on tourism or oil, and/or have a higher-density population,with an above-average share of global travel, will fare worse, possibly with negative home price growth for 1-2 years, while the less-dense, regional cities, may fare better. That is, some of the regional contracts (most notably LAV) have seen closes below spot, and have bids and offers that tend to keep dropping even 2+ years out. Others (to include BOS and SDG) seem to be priced for only small sell-offs.

Finally, I'd expect to see a pick-up in bid levels as contract expirations extend (i.e. Feb 2015), as (hopefully) the world will return to whatever our "new normal" is after a few years. (Note, that I've only just started quoting the Feb '15 contracts again, but intend to spend time, raising bids and narrowing those spreads.)

As always, most of these quotes were/are mine, and the levels were often for 1x1 markets (i.e. one lot bid vs one lot offered) so expect that prices might move sharply on a larger buy/sell order. Second, prices have tended to drift lower as stocks have fallen. Should stock prices reverse, and/or should there be a large government program benefiting homeowners (or new buyers), prices might jump. (In this case the markets are similar to 2009-12 when even the rumor of Government support impacted home prices.) Finally recall that IMHO, longer-expiration CME Case Shiller home price index contracts more likely reflect where risk clears, than expectations of future home price. As I wrote on Oct 4, I believe that these contracts clear at a discount to expectations as there are more natural sellers than buyers (in normal times!). I would further expect that such a discount would expand when all markets are selling off.

In posting this information, I'm trying to encourage others to join in with bids, offers, or even just commentary, on the clearing level for these contracts. In particular, additional/ better/ larger bids or offers on the HCI (10-city index) G21 and G23 contracts (Feb '21 and '23) would have a leveraged impact as those contracts can be used to create better markets on other expirations (via calendar spreads) or other regions (via Intercity spread trades). Any help there would be appreciated.

While trades are the most helpful, I'd appreciate users sharing their ideas on how they might want to express a view on how home prices will evolve. That is, should longer contract trade above/below intermediate contracts. Which cities are best/worst situated for home price exposure?

Please feel free to contact me if you have any questions about this blog, or issues related to the use of home price index derivatives to lower/ increase exposure to regional home price index risk.

Thanks, John

^1 Note that the CME announced changes in the expirations to Case Shiller home price futures, putting more of a focus on the February cycle than the November focus that had dominated for years.

^2 Note that the G21 and G23 contracts are only three months longer than the X20 and X22 contracts which I cited in my January report.