Many home price analysts noted that today’s Case Shiller indices continued to record year-on-year (“YOY”) gains. While YOY gains are a great way of addressing seasonal issues, and take on a more “over time” perspective, a fixation on YOY gains may hide turns in the market.
The table to the left shows three Case Shiller regions (Seatlle, San Francisco and San Diego) that exhibit YOY gains, but where seasonally-adjusted (“SA”) levels have fallen.^1 Readers hearing about positive YOY results risk projecting such past results into the future. By contrast, the Feb 2020 CME Case Shiller home price index futures are priced consistent with continued further declines. ^2 While the futures have had near zero volume, the quotes do reflect the feedback I get on multiple inquiries. Net, users should not be blind to posted YOY headlines and might benefit from: 1) looking under the hood at shorter-term moves, and 2) giving some weight to the one-year forward looking CME contracts (or other derivative markets on home prices).
Further, “if” home prices were to turn lower (a view that is being hotly debated as interest rates have fallen), it wouldn’t be the first time that YOY results were misleading and that CME contracts were priced for declines in forward prices. The table to the right shows seasonally-adjusted index values as of Jan 2007 for three other regions (Las Vegas, Phoenix and Miami) that all presented with YOY gains, but shorter-term declines, as well as CME futures with lower closing values for the Nov ’07 contract.^3
Net, be careful when you hear positive YOY stories, if there are other negative signals.
Please feel free to contact me (firstname.lastname@example.org) if you have any questions on this blog, or any aspect of hedging home price indices.