As I’ve written earlier, I’m trying to get first-time readers (and the press) to focus on the CUS Nov ’16 contract as a benchmark of market sentiment for the overall home price market. A benefit of focusing on one contract is that after readers are used to following one price, that contract can be used for examples to illustrate issues germane to the overall market or regional indices. That is my agenda here today.
The graph below shows the prices of the CUS Nov ’16 contract vs. the Case Shiller (CS) CUS spot index on the same date since Dec 2, 2011, the date the (5-year) Nov ’16 expiration was introduced. (Since the CS index is only released monthly the graph looks like a step function).
Note:
- During 2012, while the CS index was falling, CME prices were rising. This highlights that sentiment (which is forward looking) can go in a different direction than indices (which reflect backward looking analysis). CS indices did turn up later in 2012.
- Sentiment can go through periods where there is uncertainty and prices adjust (e.g. the summer of 2013 when market sentiment dramatically changed) or can go through periods of long tranquility (e.g. most of 2014 when, CS index values were coming in at a pace consistent to eventually rising to forward prices).
- Since forward prices reflect the cumulative impact of where index values might be some years from now, changes to forward prices seem to be much more volatile than changes to CS indices (which are moving averages across only a 3-month period). (e.g. May – Sept 2013).
- Market prices and index values now seem to be moving in the opposite of 2012 in that -after a very long period of stable forward prices – contract values are falling (falling from 2010 on Sept 11 to 205.4 last night), while the CUS index level continues to rise. I’m not suggesting a complete parallel to 2012 with a lower CUS index value at any time in future (absent seasonal factors) but, since the index values and contract prices must converge at expiration the question as to what level the market “expects” them to converge now seems to be much more open to debate.
In my experience as market maker, changes in sentiment tend to correspond to increases in trading. (May-June 2013 remains the high volume month over the last few years). There have already been 12 CME trades by Oct. 10th, which while still not a lot, is more trades in the first ten days of any month that I can remember going back years). Net, trading picks up when sentiment changes, and sentiment – at least as evidenced by the Nov ’16 (benchmark) contract – has changed.
Please feel free to weigh in on the debate as to where the CUS index will be in Nov ’16 and/or to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog or any other aspect of hedging home prices.