Tag: CME

CME Price declines since Sept 5

While many reports focus on the historical robustness of home prices (e.g. “FHFA Home Prices See No Slowdown”), and some pundits have only slightly revised lower their forecasts for home price gains for 2019-20 lower, quotes on the CME Case Shiller home price index futures are consistent with more bearish outlooks.

The graph below highlights how much CME contract closing prices have fallen since Sept 5, 2018.  The graph shows the Case Shiller HCI (10-city index) in black, and then graphs of the closing prices for the available contracts for Sept 5, 2018 and Jan 23, 2019.^1  Below the graph I’ve shown the drop in closing prices, as well as the percent decline.  As I’ve written before, note that forward prices (i.e. Nov ’20/’21) are now below spot levels (“inverted”). 

Similar graphs are available in the Reports section (or access here) for eight other regions.  Those graphs illustrate that CME contract price declines have not been uniform.  For example, the SFRX20 (Nov 2020) contract is lower by more than 8%, while the LAVX20 contract has barely moved.

Much has been written about inventory shortages providing support to lower-prices home, while at the other end, prices in the more expensive, global cities (e.g. Toronto, Sydney, London) have been coming under pressure.  The scatter diagram below maps the changes in regional X20 prices versus the Case Shiller index cut-off for high price homes. ^2  Regional home price index changes appear to be correlated to regional prices (as measured by the cut-off in high priced tier).  SFR (and the two other higher-priced California indices) has sold off the most, while LAV (the area with the second-lowest high price home cut-off) has barely moved.

 

Again, the standard qualifiers for what users might read into this information applies.  Contracts are thinly traded (with only about ~100-150 contracts traded per year over the last three years), and many of the quotes are mine.  In some contracts (e.g. BOS, LAV, MIA, and WDC) there is no open interest.  However, quotes posted on the CME were, and are, live.  Users were able to (and did) sell SFR contracts before the collapse in prices.

While some point to lack of volume to question posted levels, I’d submit that as market maker, my role is to take inquiries and continually adjust prices to levels that I think will bring balance to markets, or to where I’m open to both bidding and offering.  So, even if there have been no trades in some contracts, contract prices may have moved as a result of feedback on users’ views.  In that sense these markets reflect more than just my views.

I’ll concede that as sentiment becomes ever-more one-sided (as the vast majority of the inquiries I receive are from hedgers),  contract prices may be (ever) lower than expectations.  Such an imbalance of orders, might present an attractive opportunity to risk-taking entities (e.g. insurance companies, pension accounts, hedge funds) looking take exposure to a new sector trading below expected levels.

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 Note that where there are no open contracts (e.g. Feb 21, Aug 22) contract prices have been interpolated.

^2 Recall that Case Shiller indices are available by price tiers: https://us.spindices.com/indices/real-estate/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index

 

 

Nov ’17 contract expiring -tomorrow’s #s??

With the expiration of the CME Nov ’17 Case Shiller futures on the ten regional (and one 10-city index) today, we get to see: 1) an illustration of convergence, and 2) what “the market is predicting” for tomorrow’s Case Shiller numbers.  Recall that CME contracts settle on the index values released on the last Tuesday of every month.  Recall also, that while there are CME contracts expiring on a quarterly cycle (i.e. Feb, May, Aug and Nov) that the November expiration is the one that has the longest time outstanding.  That is, the Nov ’17 contract was opened Nov ’12, and tomorrow, the CME will open a contract for Nov 2022.

The graph below illustrates the key point of all cash-settled contracts.  That is, since the contract is settled on the index value at expiration, the contract price and the index must converge to the very near the same price.  Note that while the Case Shiller 10-city index has been rising the last 2+ years, that the futures contract has been range-bound between 210 and 220.  That is, while the press has been reporting on the “news” that home prices have continued to rise, expectations (at least as measured by the closing prices of the Nov ’17 HCI contract) have barely changed.

Second, I mentioned that prices converge to “very near the same price” as traders don’t know precisely what the Case Shiller index numbers will be tomorrow -despite the fact that the data for the indices (to be released in November) over the period July -August -September.  I acknowledge that there are huge efforts to predict tomorrow’s numbers, but, in theory, those numbers should be incorporated into CME quotes.

The table below shows bids, offers and mid-market levels on the 11 contracts (as of 10 AM) that stop trading at 3 PM (EST) today, and settle tomorrow.  (Note that end of trading on front contract is before close of trading (4 PM- EST) on other contracts).  Contract bid/ask spreads average just under 1.0 point, with the HCI (10-city contract) the tightest, as is often the case.

As an example, should someone “know” that the SFR index value to be released tomorrow will be 243.0, they could sell a contract at the current bid of 244.0 and collect $250 (i.e. the value of one point per contract) when the 243 index is printed tomorrow.  On the other hand if someone “knows” that the index will be 246.0, they could buy a contract at 245.0 and pocket $250 when they are proven correct.

Since neither has happened (yet) today, I would posit that the SFR index tomorrow will be somewhere between 244 and 245, so there is no arbitrage opportunity.

Feel free (and I will blog tomorrow) to compare the actual results against the 3 PM quotes on these contracts.  While I embrace the theory that these contract values should provide boundaries on expectations, in each quarterly expiration we see 0-6 outliers/surprises (i.e. where the index value is outside the bid/ask quote on the previous day).

If anyone has any questions on this blog, or any other aspect of hedging home price indices, please feel free to contact me (johnhdolan@homepricefutures.com).

Thanks,

John