I’ve compiled the following graph to pose the question, and prompt debate: should forward HPAs (i.e. annualized home price appreciation rates) converge across regions?
The graph stitches together year-on-year (YOY) price differences both between the CME Case Shiller home price index futures contracts and historical Case Shiller indices, as well as between futures contracts. For example, mid-market values of the May 2018 contract are compared to index values released in May 2017 (and the same for Aug ’18, Nov ’18 and Feb ’19 futures prices against historical Case Shiller indices), and then mid-market values between pairs of futures contracts are compared (e.g. the mid-market value of the May ’19 contract vs. the May ’18 contract, Aug ’19 vs. Aug ’18 contract, etc.).
While recent momentum, local wealth creation (e.g. in SFR (San Francisco) on tech stocks), and possibly inventory shortage, have pushed expected YOY gains in some regions to higher levels than average (i.e. SFR and LAV (Las Vegas)), by Nov ’19 all YOY gains converge to just above 2.0%. (Note that the other eight regional contracts include: BOS (Boston), DEN, (Denver), CHI (Chicago), LAX (Los Angeles), MIA (Miami), NYM (New York) SDG (San Diego) and WDC (Washington DC). The prices on the futures contracts expiring in 2019-2020 are consistent with slowdowns in HPA, but still positive gains, at about the level of income growth. It may also be consistent with a notion I’ve had for years, that forward prices are biased to be lower than expectations, as there are (at least based on current inquires) an abundance of hedgers.
However, most of the price inputs are mine (so I can’t offer a third-party analysis of what “the market is thinking”), and YOY gains across the regions -despite different momentum and despite differences in population gains -converge to about the same low rate.
Does it seem plausible that YOY gains for 2019, at least as priced in by longer-maturity CME contracts, should have SFR/LAV (the strongest contracts for the next year) and CHI/WDC (the weakest two based on one-year forwards) converge, and to converge to only 2% HPA?
I suspect not, and if there are readers looking to debate the point, I’d be open to trading some calendar spread pairs. (Recall that in trading calendar spreads one can simultaneously buy (or sell) one regional contract, while selling (or buying) a longer contract at a pre-determined dollar spread.) I would think that buying one regional calendar spread, while selling another region’s spread (covering the same time periods), might be a way of expressing views on relative HPA gains.
Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss this blog, or any aspect of hedging home price indices.
Thanks,
John