There’s been an ongoing inconsistency between forward prices in the CME Case Shiller futures, and the quarterly Pulsenomics survey of home price forecasts. CME futures (at least those for 2020 and beyond) are priced at levels that appear to have a much less bullish outlook than the Pulsenomics surveys. There may be several reasons for this (to be touched on below) to include that the risks associated with futures trading (at least versus participating in a survey) have created an opportunity for those who embrace the survey results.
To be clear, I am a huge fan of the Pulsenomics survey (as well as a contributor). I’m just highlighting this inconsistency to prompt discussion, and hopefully more trading in CME futures.
Prices for the rolling 11 expirations of Case Shiller futures have been consistent with sharply declining HPA (post 2020) for at least the last year. The graph below shows the YOY gains for the published Case Shiller indices in black. To the right, marks show bids and offers on futures contracts (either against historical index values -e.g. Aug ’18 contract vs. index value released in Aug ’17 – or for one futures contract versus another -e.g. Nov ’21 contract vs. Nov ’20 contract) are shown. Note how YOY gains (using the mid-point between bids and offers) trends down to 1% YOY price differences for 2021 vs. 2022. (The low level of YOY gains is even more pronounced in the SFR -San Francisco -contracts).
By contrast a review (see diagram below) of the Pulsenomic survey results for 2018 Q2 show a much less gradual decline in explicit expectations. CME quotes fall from having ~6% YOY gains priced in for the Nov ’18 contract (vs. the index released in Nov’ 17) but then fall to ~1% in 2022, while the Pulsenomics survey of expectations tapers off to about 3%.
Now I appreciate that there are differences between Case Shiller and Zillow indices, and that the Zillow survey represents contributions from around May -while the CME prices are today, and finally that CME bar chart values are comparisons of the CME quotes on the November expiration cycles (thus referencing the September Case Shiller index) while the Pulsenomics survey is for year-end index estimates. That all said, the observation that longer-dated CME contracts appear to be priced at levels that are much less bullish that the survey results of 100+ economists, seems valid.
I’ve spent the last few months wondering if there is a technical issue driving this, or do longer-dated CME contracts represent a good risk/reward versus expectations, or is there some other factor. I offer no concrete views, but here are a few things worth considering:
- There are few parties involved in the CME futures. I’m often on both sides of many markets. The prices I’m willing to buy/sell could be “wrong” (air quotes).
- The vast majority of inquiries I receive (or where I’m asked to trade) typically involve individuals looking to hedge. Thus in the small world of CME trades that have existed over the last few years, it may be that the capital looking to be deployed on the sell side is larger than the capital I’ve been willing to deploy on the buy side. As with #1, the arrival in this market of a large participant on either side might move prices up (or down).
- The markets could be turning (as many have long touted). Toronto and Sydney -two previously frothy markets -have both turned lower.
- Does having “skin in the game” (i.e. traders with positions) allow for different result from surveys?
Markets are wonderful platforms for traders to observe, debate and actually trade. Trading tends to increase when markets turn, or when there are stronger differences of opinion. Is this one of those times? Are longer-dated contracts distorted by an imbalance of hedgers, or do longer-dated contracts represent an opportunity to “lock in” lower than historical gains? Will rising rates, and/or inflation, be kind or harmful to home prices? Should surveys or markets guide forecasts (or both)?
Please join what looks like an ever-more vigorous debate. Feel free to contact me (email@example.com) if you have any questions about this blog, or any aspect of hedging home price indices.