Pulsenomics survey: Why are surveys results more bullish than Case Shiller futures?

The quarterly Pulsenomics survey results for Q4 have been released.  (Link here.) I consider this to be the best overall survey of home price expectations as it is broad (with ~>100 contributors -and for fair disclosure, to include me), consistent (in that the format has remained the same), historical (in that the survey results go back years), and current (as the survey is done 4x/year and these results were compiled in the last 30 days).

That said, I continue to observe that the survey results tend to be more optimistic than implied by the CME Case Shiller home price futures, and remain frustrated that those with outlier views (in either direction) won’t take a nominal position.

The bar chart below shows the distribution of 95 forecasts for the cumulative gain of the ZHVI (Zillow) home price index value for 2019-2022.   (I truncated the 2018 forecasts to come up with these numbers.).   The results have a mean value of 12.15% (with a median of 12.77%) and a standard deviation of ~8%.  Consistent with that, 74% of the forecasts are between +5% and +20%.

I’d note that at the time this survey was being taken (Nov 5-18) the CME HCI (10-city index) contract for Nov ’22 had a mid-market value that was about 2% above current spot levels.  This pattern, of CME futures quoted well below consensus Pulsenomic survey results, happens almost every quarter.

Now, with full acknowledgement that the indices are different (ZHVI vs HCIX22), that the time frames are slightly different (2019-2022 for Pulsenomics survey vs. Nov ’18 vs. Nov ’22 for CME futures), why might this difference persist?

 The Zillow and Case Shiller methodologies differ, although both try to capture changes in home prices.  It’s no surprise then the both indices are 45% above a past value (Sept. 2012).

The graph below (showing YoY percent changes of each index) illustrates that the Case Shiller indices have been more volatile than the ZVHI index.  As such, housing bulls (e.g. those looking for >10% gains over 2019-22) might expect the Case Shiller 10-city index to out-perform the ZHVI index.  

I’d note that the CS 10-city index has more of a coastal, urban base, which may be more at risk to changes in SALT (State and Local Tax) deductions.   Further, should waves of Millennials move from the cities to the ‘burbs to set up house and have babies, national versus 10-city indices might out-perform.  Finally, Core Logic economists project the Case Shiller indices to underperform. Net, some outperformance of a more national index may be plausible.  The question remains how much?  Is the difference between the CME mid-market price of ~2% gains (from 2019-2022) versus the ~12% gains from the Pulsenomics survey (and other forecasters), or more than 2% per year, justified?

My sense (belief) is that the CME markets may be skewed by the (very limited) number of participants involved.  That is, while I hear from many “natural” hedgers (e.g. those with more than one house, or those looking to downsize), I do not hear from many natural longs.  Such longs might include overseas investors, Millennials who have not yet bought a house, and pension plans and insurance companies who tend to be underweighted in their exposure to home prices.  As such, at this point in the real estate cycle, the longs may be more speculative in nature, and may need an incentive -i.e. a discount from “fair value” or expected levels -to induce them to participate.  

With the markets being so thinly traded, I’d expect the discount (between Pulsenomics and CME prices) to narrow, should natural longs show up to the CME forward market. I’ve written earlier about how futures prices might be an alternative to Fractional Interest programs.  In addition, futures (or OTC forwards) might be a good way for Millennials looking to hedge partial exposures to the areas where they might eventually want to buy.  Both might be avenues that bring natural longs to this (and other home price index markets).

For now, longs are price setters, able to get whatever discount the hedgers will pay, but taking on positions that are difficult to hedge.  Speculators -particularly more bullish housing economists -might consider speculative longs, before the discount shrinks.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss this blog, or any other aspect of hedging home price indices.

Thanks,  John



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