The importance of QQQs and QvQs in projecting HPA gains for SFR (and other regions)

OK, I just wanted to have some (geeky) fun with a creative title that might might then transition into some serious  comments on home price outlooks.  Here goes:

QQQ is the NASDAQ symbol for the benchmark ETF that is loaded with popular technology companies, many of whom have a large presence in the Bay Area (e.g. Apple, Facebook, Alphabet, Netflix).  The ETF is up more than 24% in the last year, and those stock gains have probably had a big impact on rents and home prices in the SFR contract area.  However, recent setbacks (e.g. Facebook dropping nearly 20% in one day) might be leading some investors to question how much further this sector can rise, and therefore whether the tailwind on the SFR index (at +10.87% in the last year) will continue.

Most market participants know of QQQ, but few follow the QvQs traded in the CME housing price index futures.  The QvQ second portion of the headline is my reference to one year calendar spreads between the Q18 and Q19 contracts.    There’s little publicity, and almost no trading, but I think that it might be a useful tool for measuring sentiment in expected HPA (home price appreciation).

The table to the right shows Friday’s prices for the outright Aug ’18 and Aug ’19 markets, as well the calendar spread quotes for all 11 regions.   Recall that a calendar spread allows traders to simultaneously enter a long and short on two contracts at a pre-determined priced difference.   For example, in the HCI (10-city contract) the bid represents one traders willingness to buy the Aug ’18 (Q180 contract 7.8 points below where she’d sell the Aug ’19 (Q19) contract, while the calendar spread offer would do the opposite (i.e. sell Q18 at 6.8 points below the purchase price of the Q19 contract).

Theses differences can be converted into percent gains versus the mid-point of the front (i.e. Q18) market.  That is, the =7.8 bid is 3.4% of 227.3 mid Q18 market, while the -6.8 offer is a 3.0% difference.   While traders can post prices for a variety of reasons  (to include more hedgers than natural longs over a one-year horizon),  the Q18 and Q19 markets should each (eventually) converge to the indices released in each of those two months.  As such, some might view calendar spread markets as an approximation of (conservative) expected YOY gains in the index.

A key point to note is that for many of the 11 contracts, the QvQ  (Q18 vs. Q19 calendar spread markets, are priced at levels consistent with a large slowdown in HPA.  For instance, the LAV index is up 12.6% in the last year, but the LAV Q18/Q19 calendar spread quotes are consistent with about 5% gains for the next 12 months.  In addition to LAV, the DEN, LAX, SDG and SFR calendar spreads are centered around levels where one year forward HPA would be <50% of the last 12 months.

Again, there’s been near no volume, so thinness of markets is another possible explanation.  That said, each of the quotes is (or at least was) actionable.

Several prominent housing firms (e.g. Core Logic) are calling for >6% returns over the next year.  Now while the reference indices may differ, the magnitude of the differences between such forecasts and the QvQ markets suggests that something is out of line.   If the forecasts are correct, there may be an opportunity for a trader to sell a calendar spread (i.e. go short front contract, long back contract) and make money as higher HPA (and therefore higher forward prices) are realized.  On the other hand if the QvQ market quotes incorporate forward market views, then opinions on gains for the next 12 months might need to be shaved.

Net, you should follow the QQQs to see how home prices in the SFR market might change, but don’t ignore the QvQs.

Feel free to contact me ( if you have any questions on this blog, or any aspect of hedging home price indices.

Thanks, John



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