Concerns about a recession and/or an easing in home price fundamentals have resulted in longer-expiration futures prices falling below spot. This is the case in the CME 10-city index futures ("HCI" or "CUS") out to the February 2027 contract, as well as for several regional contracts. (See graph below). This is (logistically) due to two offsetting features: 1) the tail winds of higher home prices, and strong seasonal factors, through April (which boosted the spot levels)^1, 2) combined with hedgers who have a lot of latitude, looking to "protect" gains they've realized on purchases over the last ten years. (For example, if your home price is up 50-70%, do you care about how much do you care about basis risk and/or leaving 5% "on the table" to hedge those gains?!?).
While this means that the hedgers no longer get to sell futures at a premium to spot (which, as shown by the blue line they could do in early May), natural longs now should question why they would buy product based on spot prices (or generated from spot activity -e.g. new loans) when they could buy home price exposure, at levels below spot, by using futures. Other than a short dip in 2018 (when California home sales dipped) and the first two-three months of the Covid scare (when all markets collapsed) this might be the first time that exposure can be added at a discount to spot since 2011.
Now, of course, the contracts overall have little volume, and I've tended to ignore the 2026-27 contracts over the last weeks as I addressed the spike in inquiries from people looking to hedge Feb 2023-24, so take the offerings in 2026-2027 as an invitation to chat.^2 The 2026-27 price are based on calendar quotes that assume a relatively slow rebound in prices from an unknown low. (Importantly, calendar spreads might be a useful tool should anyone want to start debating what the turn in home price, post-recession, might look like. Anyone want to guess on shape/direction/magnitude of G26/G27 curve?!?). Nevertheless, I'd love to engage with natural longs (either institutions looking to add exposure to home prices, renters, and/or Millennials/ other first-time homebuyers, who are frustrated by feeling that they must keep paying up.)
One institutional challenge that this inverted curve might raise (if there was more volume), is what happens to the shared-appreciation mortgage/ home equity extraction business models when forward prices are less than spot. Even though I don't profess that lower forward prices suggest lower expectations, why should a home-equity monetization buyer purchase a basket of unknown equity exposures (of uncertain tenure), and lay out 100% of the purchase in cash, when they can buy exposures on a well-defined index with public pricing, on margin, to a specific date (and at a discount to spot), while investing the cash.
I'm aware that some programs set a pivot price (where equity begins to be shared) at a discount to spot, but part of that discount is needed to offset the imbedded interest rate in "lending" money to someone looking to monetize their home equity (in some cases up to ten years).
The key answer to date has been product availability, as I believe that there is >$20 Trillion in home-owner equity, and several companies in the both the cash (e.g. Unison and Point) as well as digital space (e.g. HausCoin) have been at this already for years generating institutional-sized volume, and/or have big expansion plans. However buyers of those exposures may have been more comfortable taking a basket (in some products an open-ended basket) of exposures (subject to possible adverse selection, gaming on the back-end) because market forecast of 10+% plus gains.
Net, sometimes buyer enthusiasm can push prices beyond "fair value", and sometimes sellers can push prices below "fair value". This is particularly true for such a thinly traded market such as the CME Case Shiller home price index futures. I don't know if that's the case here, but IMHO it might be worth a look by natural longs to see if motivated hedgers have, in your view, pushed prices too far.
Of course we may only be in the second inning of a recession and spot and 2023-24 price might fall much further. In that case, I'd encourage institutions to dabble in this market (beta testing how they view exposures) so that when they are ready to buy, they can pull the trigger with more confidence.
Finally, this market will only survive (like the MBS markets) when natural longs and natural shorts both see a benefit in using it continuously. That is home price flippers and builders (and their banks) see a benefit in hedging from the short side (through all markets) while institutions feel comfortable allocating funds to home price exposure in a system with public pricing and a deeper secondary market.
Both sides should have an interest in making this a deeper market. I'm happy to facilitate any looking to help make that happen.
For now, I'm keeping my focus on longer-expirations to the 10-city market as my approach is to find clearing levels there before going off into less-liquid component city markets. However, I'd be happy to take inquiries on longer-expiration regional markets as a) I might end up being able to match your inquiry with something similar (e.g. LAX v SDG or G25 vs G26), or b) might be willing to propose a counter.
Feel free to contact me if you have any questions related to this blog, would like to add comments (which I'll note in future edits), or would like to learn more about using home price index derivatives in hedging strategies.
Thanks, John
^1 Recall that the recently updated CS index posted on June 28th cover activity from February to April. Other indices may be more current, but most have some sort of lag.
^2 I would sell 5 HCIG27 lots today at 311.0