A longer persepctive -“MBA conference attendees, welcome to DC!”

While Thursday’s blog focused on the more recent markdown in CME home price futures as the stock market fell, with the Mortgage Bankers Association meeting starting this weekend in DC (my new home), I thought that I’d give attendees one comprehensive table, covering a longer timeframe, to chew on.

The table below shows quotes (bid, ask, and close) on the HCI/Case Shiller 10-city index contracts that are traded on the CME (with prices for Oct 12 and June 29th).  There are contracts expiring at 11 different dates ranging from Nov 2018 out to Nov 2022.  (I’ve also added -in orange -values for the Case Shiller index for the preceding seven quarters).   Since the contracts “cash-settle” on the Case Shiller index value released in the expiration month (on the last Tuesday), some have argued that contract prices might incorporate expectations of future home price index levels, as at least one component.

A few notes:

  1. Closes are higher on longer expirations, consistent with further increases in index values.
  2. Closes from June have fallen, and the biggest declines have been in longer-dated contracts.
  3. The percentage difference between year-on-year closes are consistent with HPAs declining over time.  (See middle yellow column.)  Note that recent YOY (HPA) gains of >6% begin to tail off in early 2019, before dropping sharply into 2020 and beyond.

Now three key qualifiers:

  1. There has been near no volume on these contracts, but all bids and offers were actionable, so any traders who were more bullish/bearish that quotes could have acted on them,
  2. There may be many reasons for trades to buy/sell beyond expectations, however, as settlement approaches, index values and contract levels should converge, and
  3. I offer no rationale for why prices have, or should change.  I’ll leave that to the conference panels.

I am happy to provide the same analysis for anyone looking for such on any of the ten regional contracts (BOS, CHI, DEN, LAV, LAX, MIA, NYM, SDG, SFR and WDC).

Please feel free to contact me (johnhdolan@homepricefutures.com)  if you have any questions about this blog or any aspect of hedging home price index risk.  I’d be happy to meet at the conference for anyone looking for more detail on how one might use/interpret these contracts.

Thanks,

John