Blog – HomePriceFutures.com

Introducing Home Price Hedging Fund (“HPHF”)

I’ve created an entity called Home Price Hedging Fund (“HPHF”) to facilitate OTC trading in home price indices. While I remain of the view that the CME platform is the most transparent, pure-play on forward home price indices, I have received a number of requests from readers looking to express a view on home price indices not referenced by the CME Case Shiller contracts. HPHF was created to try to serve those readers’s needs.

An overview of HPHF is in the Reports section, or you can link here . Please review to understand any similarities and differences between HPHF and any other platform (to include CME) that might facilitate trading in home price indices.

At a high level, I’ve designed HPHF based on my 8+ year experience as market maker in the CME Case Shiller futures with certain attributes that recognize that interest in hedging of home price indices has been diffused, that potential buyers and sellers of a particular index haven’t had a place to meet, and that buyers and sellers might want to act at different times, or on different expirations. I recognize that home price index hedging is a relatively new concept for many parties, some of whom may have limited experience in financial derivatives (e.g. brokers, current homeowners, Millennials considering a future home purchase) and as such, am intending to post designated time frames to bring buyers and sellers together, with a focus on one expiration per index, for simple contracts referencing smaller “bite-sized” notional exposures.

To contrast, while one approach might be to have a highly-capitalized, continuous market maker (with possibly opaque pricing), I don’t see the need (and don’t have the ability) for 24/7 trading in other home price indices. Instead, I’m attempting to bring pre-cleared buyers and sellers together, to have them share their views on where they would commit to buying/selling an index (to start, on the index value for year-end 2019), and to match interested parties.

HPHF will post bids/offers in the run-up to a posted auction (to share thoughts on where at least one lot will trade/ establish reserve prices), but then will aggregate inquiries using a second-best bid protocol, to match buyers and sellers at one price. (That should assuage some participants about over-paying or distressed selling).

I’m open to ideas as to what auctions people would like to see. Given recent volatility and press coverage, and interest expressed by users, I’m inclined to start with Seattle, Minneapolis and Atlanta referencing the Case Shiller indices. I also hope to have auctions on Texas exposures (to include Dallas, Houston, and Austin) soon after, however it makes no sense to hold auctions until some number of potential users have applied.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have: 1) any questions on this blog, 2) would like forms to be pre-approved to participate in an auction, or 3) have particular home price indices that you’d like to see auctioned.

Thanks,

John

The danger of fixating on YOY results

Many home price analysts noted that today’s Case Shiller indices continued to record year-on-year (“YOY”) gains. While YOY gains are a great way of addressing seasonal issues, and take on a more “over time” perspective, a fixation on YOY gains may hide turns in the market.

The table to the left shows three Case Shiller regions (Seatlle, San Francisco and San Diego) that exhibit YOY gains, but where seasonally-adjusted (“SA”) levels have fallen.^1 Readers hearing about positive YOY results risk projecting such past results into the future. By contrast, the Feb 2020 CME Case Shiller home price index futures are priced consistent with continued further declines. ^2 While the futures have had near zero volume, the quotes do reflect the feedback I get on multiple inquiries. Net, users should not be blind to posted YOY headlines and might benefit from: 1) looking under the hood at shorter-term moves, and 2) giving some weight to the one-year forward looking CME contracts (or other derivative markets on home prices).

Further, “if” home prices were to turn lower (a view that is being hotly debated as interest rates have fallen), it wouldn’t be the first time that YOY results were misleading and that CME contracts were priced for declines in forward prices. The table to the right shows seasonally-adjusted index values as of Jan 2007 for three other regions (Las Vegas, Phoenix and Miami) that all presented with YOY gains, but shorter-term declines, as well as CME futures with lower closing values for the Nov ’07 contract.^3

Net, be careful when you hear positive YOY stories, if there are other negative signals.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price indices.

Thanks, John

Footnotes:

^1 -I could spend an entire blog debating the merits of seasonally-adjusted numbers, particularly post the Financial Crises. For purposes of this discussion, I’d note that seasonal distortions tend to be lower when the percent of distress sales is stable and low -today’s environment.

^2- See many past blog qualifying what weight to give to thinly traded CME contracts.

^3 -Price quotes for the one-year forward Feb 2008 contract were not available until March 2007.

OTC forwards and options for other regions

While the CME Case Shiller contracts cover many of the largest cities, I frequently get asked about hedging either other regions, or more narrowly defined geographic areas with the ten traded Case Shiller regions. I believe that, in concept, OTC trades can be structured between two willing, informed parties, that will allow a user to hedge any index, using forwards and options.

The table below is my recent effort to put prices on forward trades and options (for Feb. 2020 expiration), for the ten public Case Shiller indices that make up the balance of the Case Shiller 20-city index. I’d love to get feedback on the price levels (both forwards and options) and would be happy to pursue an OTC trade. Again, I’m showing ten Case Shiller regions, but this should work for any city/ MSA/Zip Code. Please send your inquiries as I’m looking to “build a book” of parties looking to hedge exposures. (BTW -the more generic and publicly accessible the index -e.g. Seattle Case Shiller -the more likely I, and others, will be able to do analysis and find someone else interested.)

A few nits about this OTC effort. Since there is no public forward market, there is quite a bit more price-discovery risk, so I’m offering to do trades at $100/point (not the $250/point used on the CME platform.) Further, for both the forwards and options, I’m going to use a band of +/- 10% around the strike price for maximum payouts. In addition to reducing risk, it will also make easier to collateralize any positions.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog, or any aspect of hedging home price indices.

Thanks, John

Moving? A potential application of Inter-city (IC) spreads

Redfin recently published a great piece that detailed how some residents look beyond their local area for their next house. They noted that many many people in a region look at the same next cities (sorted both by in-state and out-of-state searches) with certain marked preferences. For example, many LA residents eye San Diego, New Yorkers frequently consider Boston, and Denver homeowners seem to covet Seattle’s low taxes.

The graph below (from Redfin) show the net flow of users searching for other regions. (Net flow is the number looking to leave versus the number looking to take up residence). Seattle has recently re-taken the award for most people looking to move there, while Denver residents are looking elsewhere in larger numbers. This is interesting data to those who believe that population flows are a key component to changes in home prices.

Residents moving from one region another may face the risk that home prices will fall where they live, while rising where they want to move. Fortunately, my analysis suggests, and other research confirms, that home prices on many of the common pairs that Redfin identified are highly correlated, using region-wide measurements. ^1 For example, using YOY changes in Case Shiller indicies, the LAX, SDG and SFR regions have all been >90% correlated since 2013.^2,3 Surprisingly (to this former Connecticut resident now living in DC) the correlation across the three Northeast regions is not as strong, ranging from as low as 43% between NYM and WDC, to >75% between BOS and NYM and WDC.

For those in the later categories, intercity spread trades may be a useful tool for going simultaneously short futures on the region they’re leaving, while going long on the region to which they hope to move.^4 In effect, users might be able to hedge some of the risks of their move.

The table below lists (on the left side) the top 6 interstate 2018 transitions highlighted in the Redfin highlighted report. (I’ve added the intrastate move from LA to San Diego, as there are CME contracts on both). While the Redfin article has much more detail on the net number of people moving, my contribution to this discussion is to share how the CME markets (using the Feb ’20 contract to capture 2019 year-end values) might be used to possibly hedge these moves.

First, here’s a few explanations and observations:

For both the “From” and “To” cities, I’ve listed the current spot index, the bid, ask, and mid-market for the Feb ’20 (G20) contract on each city, or levels that I’d consider OTC trades (i.e. for Seattle, and Phoenix -highlighted in yellow)^5. The “Mid/ Spot -1” columns show the difference (in percentage terms) between the spot index for each city (both “From” and “To”) versus the spot index for each city.
Note that between the pairs of “From” and “To” cities, there are a total of 10 cities, and that for all but 3 (Seattle, Denver, and Phoenix) the “Mid/Spot -1” is a negative percent. Recall that the CME figures (at least for one-year forward contracts) don’t necessarily represent expectations of lower prices. The bids and offers are just levels that traders are willing to buy or sell contracts.
Note that in 6 of the 7 moves that Redfin highlighted, the “Mid/ Spot -1” value is higher in the destination city. (The difference between the two is shown in the “Diff” column.) Thus, it seems that either people may be moving to the more booming cities, or the act of people moving to those areas is correlated with better performing home contracts (as measured by the “Mid/Spot -1” metric.
Note that, the San Fran to Seattle move looks to have the biggest “payup” (i.e. going from a region where these quotes would be consistent with the SEX (Seattle) index outperforming the SFR index. By contrast, the move from Washington DC to New York, seems like the best bargain, as these quotes are consistent with WDC (Washington DC) index prices falling slower than NYM.

Finally, I’ve added levels where I’d be open to an intercity spread trade. For example in the NY to Boston move, the difference between the NYM and BOS “Mid/ Spot -1” numbers is 1.85%. Since both regions have a CME contract, I’d buy a NY contract while selling a BOS contract (a pair someone moving might be interested in ) where Boston outperforms NY by 3%, or go the reverse (buying Boston/ selling New York) where Boston outperforms by 1%. (See example below).
I’ve not posted this particular IC trade (or any of the others) as best orchestrated off-exchange, or users will need access to a broker who can execute IC trades.
While I’ve focused on the pairs Redfin highlighted, and for the Feb ’20 contract, in concept it’s possible to construct any other pairs of indices, for any other expiration.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss any aspect of this blog, want to move forward with any of the IC proposals discussed, or have questions on any aspect of hedging home price indices.

Thanks,

John

Footnotes:

^1 This might be no surprise as the people that like the attributes of one region seem to see similar attributes in another.

^2 Recall that correlation means that they move in the same direction at the same time, but not necessarily by the same amount/percent.

^3 Note that these are changes on the index, not any particular expiration of a futures contract.

^4 Even for those moving between two highly correlated regions, futures might be a useful tool should one be increasing/decreasing exposure.

^5 Contact me for details on how one might trade any home price index, not listed on the CME.

Feb 2020 (so referencing year-end 2019) puts

I’ve posted quotes at the CME for puts on the ten regional Case Shiller home price contracts (and the 10-city index) that expire in Feb 2020. Recall that these options will settle on the value of the Case Shiller index released that month, and that that index references data through year-end 2019.

I’ve picked strikes that are close to the closing value of the referenced futures contract. Upon request, I’m happy to discuss puts at different (5-point interval) strikes. (Different expirations can also be structured. I’ve chosen the Feb ’20 contracts as they can be part of the “where are home prices headed in 2019” discussion.)

Note also, that I’ve started entering quotes on calls. I’ll fill out the balance of the table over time, or if there’s interest on a particular contract.

I’ve not found many brokers that will allow users to trade these options. Insignia Futures (contact Joe Fallico) is one broker if you are interested. My $100 reward for anyone steering me to a futures broker that would allow for retail trading of these options, is also still alive.

Beyond these 11 contracts, I’m also open to discussing options on other home price indices for OTC (over-the-counter) trades. Please contact me (johnhdolan@homepricefutures.com) if you have any particular index in mind, that you’d like to hedge (long or short), or if you have any questions about this blog.

Thanks, John

LAV -The quintessential region for home price index trading?

My sense is that the best conditions for a home price index hedging market exist when you have:

Pronounced different views on the future
Recent history to color participants interest (or need?) in hedging
A mindset that trading (or hedging, betting) is an acceptable activity.

No regional market satisfies these three conditions better than Las Vegas (and therefore the LAV contracts traded on the CME).

First, opinions as to where LAV home prices are headed range, on the one hand, from the National Association of Realtors designating Las Vegas as one of its Top 10 Housing Markets for 2019 (with projected price gains of 7.9%), and Zillow also forecasting 7.74%), while on the other, the Greater Las Vegas Association of Realtors notes that inventory for sale has nearly doubled from the lows, and Fitch has designated Las Vegas as the most overvalued Top 20 city (at 20-24% overvalued).

Las Vegas home prices have the tailwinds of population growth and the headwinds of accessing sustainable water supply, adding to the debate over future home price forecasts.

Second, while current LAV index value (189.97) has more than doubled since the low in 2012 (of 89.88), the index is still only ~80% of the 2006 peak value (234.78). The LAV index suffered the greatest percentage decline of the Case Shiller 10-city components (~-62%), and the second largest increase from the bottom of 211% (trailing only SFR at +225%). Such volatility validates the benefits of hedging.

Third, other than possibly the Wall Street derivative community, where else in America is there a more open mindset to hedging one’s bets? LAV residents seem to have the biggest need for hedging (given both the uncertainty and history).

However, volume and open interest (OI) in the CME LAV contracts remains low. I tallied six LAV contracts trading in 2018, and current OI is three.

Recent LAV contract prices are consistent with MUCH lower home price growth for 2019, but well above levels (measured as percent of current price to spot) of the three California CME contracts (LAX, SDG and SFR). For example, LAV hedgers should note that the LAVG20 (Feb 2020 expiration contract) settles on the value of the LAV index through Dec. 2019, and is offered at 1.2% above spot levels. As I’ve noted before I don’t know whether this is due to market imbalance (w/ bias that contracts have typically traded lower than expectations), change in fundamental outlook, an opportunity, and/or reflects lack of depth in this market.

On the depth of market issue, recall that each contract has a notional value of $250* price, or just under $50,000.^1 Most quotes are 1×1, e.g. one lot bid vs. one lot offered. While posted quotes are actionable – and in bite-sized pieces that lend themselves to partial hedging^2 -my goal is not to be the market for LAV but to post initial suggestions on the market (or “line” in LAV parlance) while then bringing in as many participants on each side, to narrow the bid/ask spread and make more exposures available -on both sides. While there are some efforts that offer home price hedging products at the individual home level, I think that the CME represents the best public, trade-able, play on forward home price indices.)

In any case, I’m not suggesting that the G20 contract prices represent what I or other traders think the index will be a year from now (as traders have multiple reasons for trading) but it does reflect a level where some traders are willing to buy/sell LAV home price index risk.

In addition to futures, the CME also allows for option trading on the futures (both puts and calls). Since a change in futures prices might result in a margin call, options have a benefit of limiting the total outlay for a hedge. The table to the right has offering levels where I’d offer either puts or calls on LAV futures.

Net, the LAV market seems to have the biggest need for hedging of the larger US cities. Those who might like to have more/less exposure to regional-wide LAV home price risk, might consider the CME futures and options.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price index risk.

Thanks, John

Footnotes:

^1 Note that initial margin is often less than 10% (or $5,000 in this case). The CME sets minimum margins, but clearing brokers may charge more.

^2 See Feb 2nd blog for more details on bite-sized hedging. http://1a1.50a.myftpupload.com/reduce-the-stress-of-100-rent-vs-100-buy-decision-with-bite-sized-pieces/

Reduce the stress of 100% rent vs 100% buy decision with bite-sized pieces

I imagine that one of the biggest challenges facing a first-time home buyer (and their real estate agent) is the binary leap from 100% rent to 100% buy. Such a jump is often the biggest financial decision that people have to make. With new homes costing $400-750,000 in certain markets, this is a decision that involves a multiple of annual income. How can the upcoming wave of Millennials get comfortable that they’re making the right decision when looking at homes?

One way to possibly reduce the tension, is to make the decision in increments. CME Case Shiller home price index futures allow users to buy much smaller notional amounts of home price index exposure. For example, one contract has value of $250 * price, so a contract priced at 250, is $62,500 of notional exposure. That way, someone looking at a $625,000 house, can buy 1/10th of the exposure to a broad region (or more if they want to buy more than one contract.) While I agree that much of home price value is “location, location, location”, the CME futures allow users to lock in home price exposure to a broad area. Factors that drive home price across a region (e.g. Wall Street and communication jobs in NY, population inflows in Denver and Las Vegas) also contribute to individual home prices.

Not only can people buy bite-sized exposures to regional home prices, but given the recent sell-off in CME contract prices, in many areas home price exposures for one-year from now can be bought at less than today’s levels.

The table to the right shows Bids, Asks, Closes on the CME Case Shiller home price futures for Feb 2020.^1 I’ve added the spot index level and the % of the Ask price versus spot. Note that in five of the regional contracts, the Ask level is below spot (highlighted in red.)

Note that I’m not saying that the futures contracts suggest where index values will be. There are lots of reasons that a contract seller -to include me -might want to sell – e.g. hedging other exposures. However futures prices and index values must converge by expiration. If the pundits projecting even 2-4% gains across regional areas are correct a buyer at these levels could make money on the contracts, while also breaking down their 100% rent vs. buy decision into a small bite.

While I’ve highlighted CME contracts, the same concept can be negotiated using other home price indices in OTC (over-the-counter) trades for Feb 2020 expiration. I’m open to inquiries on many indices and have structured a product where the notional value can be even smaller (using $100/point).

I’d be open to structuring a trade on any of the other 10 Case Shiller indices that make up the balance of the Case Shiller 20-city index (Atlanta, Cleveland, Charlotte, Dallas, Detroit, Minneapolis, Phoenix, Portland, Seattle, and Tampa) the four Case Shiller areas with a condo index (BOS, CHI, LAX, and NYM), or many other public regional indices (e.g. FHFA). Please feel free to provide me with areas that you might be interested in buying (or selling, as I’d prefer to match parties rather than take the opposite side of all trades).

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

Thanks, John

Footnotes:

1^ -Recall that the Feb 2020 contract settles on the index values announced that month-end, and those values are calculated on information through Dec 2019.

Should Boston over LA be 2 points?!? -Super Bowl special (IC spreads)

Yes, I’m going to pile on to social media efforts to capitalize on Super Bowl interest. Of course what I have in mind is here is getting readers to debate which side they prefer of the current pricing that has the CME Case Shiller BOS contracts outperforming the LAX contract (using the X20/ Nov 2020 expiration) by 2 (percentage) points. In addition I want to illustrate how one might look at intercity spreads, to new readers.

To recap, one can trade either side of two contracts outright, or an intercity spread between the two. Intercity spreads allow for simultaneous execution of a long and short on two different regions at a pre-negotiated point spread. There’s no risk of doing one side first, only to see the other move. In addition, IC spreads typically are quoted at tighter levels than legging two trades.

Such IC trades can be very useful if a trader has a view about one region vs. another, but who doesn’t want to take outright risk.^1

The following table illustrates the logic required to get to 2%. Contracts trade at different prices, so quotes are converted into percentages vs. spot. The BOSX20 (Nov 2020 expiration) contracts are quoted at prices that are 98.8/101.6% above spot levels. The LAXX20 quotes translate into 96.8/99.6%. The contracts are quoted at 6 and 8 point bid/ask spreads so to buy one/sell the other would mean working at reducing the total 14 point spread (from bid on one side to offer on the other).

However, an IC spread of 60.2 would allow the buyer to own BOS at 218 (+100.7%/spot) while selling LAX at 278.2 (or 98.7%) over spot, consistent with BOS outperforming LAX by 2% between today’s spot level and Nov 2020. On the flip side a 57.4 spread would allow a user to own LAX priced at 3% under BOS.

Someone who thinks that BOS and LAX will perform about the same from here through 2020 might consider buying LAXX20 at 60.2 over Boston (as the quote has out- performance for BOS price in, while someone who thinks that LAX will underperform BOS by more than 3% migth consider buying BOS at 57.4 points under LAX.^2

Note that this type of IC spread can be orchestrated on the CME for any pair of regional contracts. In addition, OTC spreads are possible for indices not covered on the CME.

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

Footnotes:

^1 Note will always be some outright risk as the contracts trad at different prices. So while an IC trade may involve the same number of contract lots, it may not involve the same notional value. That problem can be somewhat addressed by having more of one region than another, e.g. 5 vs 4.

^2 Note that CME spreads may be quoted with negative numbers. I’ve used positive numbers here as clearer for illustration.

Majority of regions tipping toward negative HPA in 2019, falling from there in 2020.

Quotes on CME Case Shiller home price index futures have tipped over toward being consistent with negative HPA in 2019 for five of the ten regions (NYM, CHI, LAX, SDG, and SFR). Of the other fiver regions none are much above zero HPA, with BOS, DEN, and WDC just below 1%. Only BOS and LAV are priced for more than 1% gains against today’s spot levels.

The graph below is a candle graph that I use in monthly recaps. Price quotes on each of 11 CME regions (the 10-city index contract (HCI) and each of the ten components) have been converted into percent vs. spot for bid, ask and mid. For example, the BOSX19 bid, ask, and mid are 218.0, 221.0, and 219.5, while the BOS spot index is 216.56. Each bar thus shows the relative width of the bid/ask spread as well as the pricing vs. spot for each region, standardized on percentage terms. The outliers include LAV (priced consistent with gains for 2019), and SFR (priced at 2-3% declines through 2019 and 2020.) There are 22 bars, one for X19 (Nov ’19) and one for X20 (Nov ’20) for each of the 11 regions.

The graphs shows which contracts are above 100% (i.e. where prices would be unchanged versus spot), and compares the X19 to X20 ratios. Note that as a general rule, regions with lower prices for X19, tend to have even lower prices for X20. Hence, the net inference one can draw is that quotes are consistent with falling home price indices in 2019 for half the contracts, but that prices are lower in 2020 (vs. 2019) for almost all.

I’ve written recently how all CME quotes need to be taken with a huge grain of salt. The biggest point is the thinness of trading, as well as my belief (that I will explore in an upcoming blog) that longer-dated (i.e. more than 9 months) futures prices tend to be quoted at a discount to expectations. (See Dec 11 blog: Pulsenomics survey: Why are surveys results more bullish than Case Shiller futures? for more perspective). That said, several contracts are offered at discount to spot, or lower in 2020 than 2019, and no one’s “disagreed” (via an improved bid or purchase). The contracts need buyers to balance hedging inquiries I receive. Any takers willing to add what it likely a non-correlated risk to their corporate risk portfolio?

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

Observations on Bid/Ask spreads -1 Year to run

I’ve compiled an interesting set of data that I’ll use to illustrate how the CME S&P Case Shiller home price index futures have traded over the last 7+ years. It may help traders understand how to better trade the contracts, as well as quirks within the contracts. I will be blogging about over the next few weeks, to include an analysis the robustness of contract prices in forecasting, contract biases, and volatility. I’m open to ideas on what readers might want to see, and would be open to slicing and dicing the information to address any longer-term questions.

I’ll start with a presentation on bid/ask spreads for a one-year horizon. (Views using other time periods to follow).

The graph below shows the bid/ask spread on the one-year forward contract at the point nearest the quarterly expiration cycles that I could find. For example, the information for Nov. 2012 shows the difference between the bid and offer on the Nov 2013 contract. (The bids and offers come from information I’ve tallied over 7 years as market maker). Spreads have been compiled for all 11 regional contracts (the 10-city index as well as each of the ten regional components). There are 29 quarterly observations for all 11 contracts (except in May 2015 on where 7 quotes can’t be found. Note gap in graph for some regions.).

I’d draw a few observations from the graph:

Bid/ask point spreads have generally compressed since 2013 ( with the narrowest bid/ask spreads, for all 11 regions, having occurred in Nov 2017 (for the Nov 2018/X18 contract)). I attribute this first to getting past the large rally that started in May 2012. The strength of that rally created uncertainty about how much indices might rise, after falling and wandering around lows for 3-4 years after Financial Crises. Tighter bid/ask spreads since then seem to have been: 1) a function of greater participation by third parties, 2) greater confidence in my willingness to post tighter spreads, and/or 3) lower expected volatility. All three factors, and the resulting tighter spreads, are conducive to increased trading.
Note that bid/ask spreads are shown in points. Since some indices (and contract prices) are now double what they were in 2013 (e.g. the SFRK13 (May 2013) contract had a mid-market value of 132.3 in May 2012, vs. a spot index level today of 267.24) so bid/ask spreads on a percentage basis have narrowed even more. (See Graph in Reports section showing bid/ask spreads in both points and percent, or access here). BTW -The widest % spread across all 11 regions. in Nov. 2017 was 1.39%.
Bid/ask spreads have for the HCI 10-city index (shown in red) have generally had the tightest bid/asks spread. LAV and DEN have recently been the tighest as prices have not sold off as much as other regions.
All regional spreads exhibit “seasonality” in that bid/ask spreads have been tightest on November expiration cycles. (The one-year forward May contract has tended to be the widest). The relative narrowness in November contracts seems to be a function of Nov being the longest contract. As such, it has more time to attract open interest which may be important as traders have a vested interest in quotes.
I’ve tried to be more “democratic” about bid/ask spreads over the last year (putting a personally-imposed cap of bid/ask spreads for much of early 2018), and the distortion between May and Nov quotes (as well as other quarters) has been less pronounced over that last 15 months. I’m trying to promote more trading in Feb expirations, particularly in OTC trades, as that expiration references year-end Case Shiller values. As such, Feb contracts will be better in sync (from a timing perspective) with the term that most forecasters use (i.e. year-end numbers).
HCI bid/ask spreads seemed to bottom out at ~1 point bid/ask spreads in 2015, 16 and ’17, but then widened this past November (2018). I attribute that to the large sell-off seen across many contracts as California contract prices collapsed, and that I’ve written about in past blogs: CME Price declines since Sept 5 and Diagram to reflect changes in forward SFR markets. Bid/ask spreads have continued to widen since early Nov as these contracts prices have not found a bottom (i.e. a level where third-parties will buy). Only when we see two-sided interest would I expect bid/ask spreads to tighten back to mid-2018 ranges.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions from this blog, have any ideas how to analyze this new data, or have any questions related to hedging home price indices.