Tag: CUS

Recap of CME Case Shiller Futures –Post release of CS data –Feb. 26, 2013

(Murphy’s Law suggests that bad things happen at the worst time.  Such it was for me yesterday when my website crashed.  Here’s the comments that should have gone out yesterday afternoon.  Now I just have to figure out how to revert to former font size.)

The CME Case Shiller Futures proved to be “spot on” in predicting the Case Shiller index numbers that were released this morning (written Tuesday).  The bid/ask closing quotes on all 11 contracts straddled the actual index numbers.

The chart below shows bids/offers, the Case Shiller release, the mid-market value, and the comparison between the actual Case Shiller release and the mid-market.

Bid/ask spreads had ranged from 0.80 (LAV) to 2.2 (SFR, WDC) and averaged less than 2 points. (These spreads were a touch wider than other closes – but not by much .  In prior months, debates (better quotes, trades) on expiring contracts sometimes drove the bid/ask spread below one point.  This expiration there wasn’t as much “chatter” and therefore less need to unilaterally narrow spreads.  Broader participation is encouraged as it has the effect of narrowing spreads.)

Not only were all 11 contract quotes “right” but in five of the contracts, the difference between the mid-market and the actual Case Shiller index was less than the smallest trading price unit (0.20).   The last trade in the BOSG13 contract, on Feb 24th, was 153.80, was within .01 of the actual index release.

Over the last three years the closing CME quotes have typically bracketed 6-8 index releases.  (Sometimes bid/ask spreads were much tighter, sometimes there were index revisions, and sometimes the actual index results “jumped”).   While I continue to believe that there will be trading opportunities around index expirations for traders with strong views, in general, this month’s experience should serve as an example that a market’s “view”  -regardless of how thinly traded – should gravitate toward the expected results.

After the numbers were released this morning, bids generally returned but offers were higher.  The West Coast markets showed improvement, while the Northeast markets remained flat (or in the case of NYM, weakened).  There was one trade in SFRK13.

With the expiration of the Feb 2013 contract, the CME rolled out a new contract for Aug 2014.

Feel free to contact me directly (johnhdolan@homepricefutures.com) if you have any questions related to today’s markets.

Price Changes for early 2013

The price quote changes since Dec. 31 continue trends that persisted during the 4th quarter of 2012.  This table (excerpted from a much larger table in the Reports section showing all 11 contracts) shows the price changes for the HCI/CUS 10-city contract since year-end.

While it’s easier to show one table, one has to be careful about assigning observations from this 10-city average to the underlying regions.  In fact the trend of “A tale of two regions” has persisted since Q4 and into 2013.

While there have been few trades, quotes on the “warm” states (the 3 California markets, Las Vegas, and Miami) show higher than average increases, while the “cold” states (BOS, NYM, WDC, CHI and DEN) have tended to show lower increases and outright declines.

For example, using YTD changes in the Nov 2014 (X14) contract, bids have improved in LAV (+4.2), LAX (+2.8), MIA (+2.8), SDG (+4.0), and SFR (+6.0).  By contrast, BOS (-1.2), CHI (0.6), DEN (0.0), NYM (-3.0), and WDC (-2.0) all show continued relative and/or outright weakness.

So, while the bid on the CUS contract is +2.0 since Dec. 31, only two contracts (LAX, MIA) have price changes that are within two points of that “average” change.  We have more of a bi-modal distribution where the mean may not be terribly….meaningful (at least to traders in each region).

A continuation of these trends would suggest that inter-city spread trades within the two larger regions (warm vs. cold) could be done on smaller bid/ask spreads, while inter-regional, inter-city spread trades (warm vs. cold) might have some additional risk (and wider bid/ask spreads) while this divergence plays out.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have questions on this blog, or the report showing tables for all 11 contracts.  I’m open to hearing thoughts/ trade proposals on any inter-city spreads.

That said, I expect that the focus will be on the Feb ’13 contracts that expire on Monday.   Bid/ask spreads have compressed to ~2.0 points (on average, CUS =1.2).  Inter-city spread trades are another way to play the expiring contracts.  I’m open to ideas there also.

 

 

CME CS Futures vs. Expectations

Last week I reviewed how the CME Case Shiller futures lined up against the DB 3-year forecast on home prices.  Today (Dec. 26) , the Pulsenomics/Zillow home price survey (for home prices out to 2017) was released.   (click here.)  This is the best survey of forward home price expectations, is printed quarterly, has a large sample size of over 100 real estate “experts” (full disclosure: including me), and should be on anyone’s radar who deals with home prices.  Here’s a comparison of the results of that survey versus the CME markets.

First, there are some features of a comparison to the Zillow survey that existed in the comparison to the DB forecasts.   Recall that the DB survey (as well as Zillow) was listing forecasts for changes at year-end, while the most liquid CME future is the November contract that references the 3-month period ending in September.  Thus not only are the forecast periods slightly different, but the mismatchs introduce some seasonality that can’t be resolved with straight-line exptrapolation.  Further, while the DB report was written a few days prior to the CME market prices I compared them to, the Zillow survey participants made their forecasts between late November and mid-December.  As such expectations or markets might have changed.

Finally, the Zillow survey references the Case Shiller National Index, while the CME futures reference the CS 10-city index.  The 10-city index covers the larger metropolitan regions (e.g. LAX, NYM) and as such may experience different price paths (both historical and going forward) than the National index.

Given all of those qualifiers the graph below highlights elements of the survey and the CME futures.

The black line is the historical CS CUS (10-city) index.  The blue and red lines are the )Dec. 26) bid and offer lines for the CUS contracts that expire between Feb 2013 and Nov 2017.  All three reference the left axis.  The large blue squares represents the average of the Zillow survey, and the dashed lines above and below the squares represent +/- 1 standard deviation.  Those numbers are scaled to the right axis.  There is also a large brown square that represents the value for CUS-10 for December 2011.

The horizontal axis is the month in which the index is reported (so November for the later CME contracts and February for the year-end forecasts.

To illustrate, the CME Feb ’14 market (the one that settles on the Dec 2013 index) was 15880/16640 or 6.2%/11.2% above the Dec. 2011 value (149.59). (Recall that the CME trades at CS values *100).  While the average forecast on the Zillow survey for home price appreciation from Q4 Dec. 2011 (7.87%) was inside this 6.2-11.2% range, more than 30% of the survey respondants were either more bullish than 11.8% (above the offered side of the CME contracts) or more bearish than 3.94% (well below the bid side of the CME contracts).  It sounds like there should be some trades from these outlier bulls & bears (or at least from their clients.)

While the Feb 2013 and 2014 CME contracts reference the same year-end periods as the Zillow surveys, there are no Feburary contracts beyond 2014.  The graph illustrates the timing differences.

Even given all of the qualifiers, one can observe that the Zilow averages tend to fall below the CME mid-market levels, often just about on top of the CME bids.  Either the futures markets tend to be more bullish, OR, the differences between characteristics of the two indices are enough to justify the price differences.

If one believes that the larger CME markets are going to out-perform the National index, then relative shapes of the two graphs might make sense.  But, if one believes that the regional markets (think Phoenix, Charolette, Seattle) are going to be stronger than NYM and LAX, then either Zillow expectations are too low, or futures prices are too high.

As with many discussions about home price forecasts, then, this discussion comes down to an understanding of the differences between the various indices being discussed.  One can’t say that either the CME futures or the Zillow results are out of line, without having a view on now the Case Shiller National index is expected to perform relative to the 10-city index.

If you have ideas on that debate, please feel free to share them by contacting me at johnhdolan@homepricefutures.com.

 

Year-end Wall Street projections – how do markets compare?

In addition to eggnog and silly ties, this time of year brings Wall Street forecasts for all kinds of markets.  Since the Financial Crises there’s been a growing body of work from different firms related to forward home prices.  One such piece was recently released by the DB team.  (Contact Doug Bendt douglas.bendt@db.com for a copy.)

DB goes beyond a set of nationwide forecasts and offers their views on where home prices (as measured by the Case Shiller index) will be in three years across 25 regions.  As they provide forecasts on 9 of the 10 components of the CUS-10 city index, and as the CME quotes on the Case Shiller contracts do not line up with the DB forecasts, I thought that I’d share one key graph from their report, offer some observations, and hopefully generate some discussion on how traders might approach the regions with the biggest differences.

The bar graph is from the DB report, while the CME quotes are from today’s market.

The DB report shows a wide range of price projections ranging from Dallas (at the most bullish end at ~28%) to Las Vegas (on the bearish end at ~12%).  This diversity in regional real estate price projections, and with different markets headed in opposite directions,  is more consistent with markets prior to the securitization wave in the last decade.  (Contact DB for methodology.)

By contrast the CME quotes tend to show a much higher correlation across regions, and LAV (one of the weakest markets in the DB forecast) has a mid-market quote that is consistent with 15% appreciation over the next 3 years.

Now, I acknowledge that the CME bid/ask spreads are wide, and the quotes are often no more than 1 lot x1 lot so I’d caution against reading too much into them as projecting expectations.  However, both the DB report and the CME futures reference the same Case Shiller index and both are three-year forecasts.  (Recall that the CME Nov contracts refer to the index measuring home price changes ending in September, so there’s some oranges-and-tangerines element to the comparison.)

Given those common features, I think that the CME Case Shiller futures provide an excellent platform for people to agree-to-disagree.  That is, if one believes that the LAV markets will not be higher by 2015, an outright short in LAV futures might be a strategy.

If one thinks that San Diego is going to dramatically under-perform national indices then an inter-city spread trade between CUS and SDG might be considered.

Net, home price markets work best when people disagree (as opposed to the common complaint that housing is a one-sided market).  I’d encourage readers of the DB report who embrace the authors’ views to get up to speed on the CME Case Shiller futures contracts in case they want to take action on the projections.  I continue to believe that the CME platform is best theoretical way to express outright and inter-city views on home price forecasts.  We just need (lots) more volume.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss these thoughts, any other aspect of home price derivative trading, or if you’ve authored another report that you’d like to share.

Inter-city spread trades: my new reality- they work!

When you’ve been wrong, there’s no sense hiding as sooner rather than later the world will know.  I have been working with (and have previously touted) an incorrect understanding of inter-city spread trading that I now need to reverse.

Inter-city spread trades work!  One can enter an inter-city spread trade at a level, and if the level is matched a spread trade will result.

Yesterday an inter-city spread order that I had entered (offer of CUSX12/CHIX12@ 45.2 ) was executed as another trader lifted that spread offerering. Somewhat similar to a calendar spread, I am now short an additional CHIX12 and long an additional CUSX12, while the other side has the opposite positions.  (I’m still reviewing how the trades impact volume and open interest as yesterday’s trades were recorded as volume of two, while a calendar spread trade would show four.)

(As an aside, inter-city spreads “worked” before in that they may have improved a quote on one side of a trade.  I’ve seen inter-city spread orders executed in the past when each leg was better than the outright quotes in the two legs of a trade, but yesterday was the first spread order that was executed as a spread in recent memory).

Net, now that inter-city spread trades “work” there is the potential to open up new areas for trading, particulary within regional areas (e.g. the three west coast, or three northeast contracts) where the correlation across regions might be very high and traders want to opine on differences going forward.  (Note to self, need to test/blog).

The table above shows six working inter-city spread orders on the two contracts with the greatest open interest (CUS and CHI).  I’ve included implied levels for each leg to help traders visulize how these inter-city orders narrow the effective bid/ask spreads on each leg. The implied prices on the inter-city spread orders are within the bid/ask spreads of the outright CUS and CHI market. (In fact, outright bids and offers were improved on three of the six outright quotes this morning as a result of these orders.)

I’m open to teeing up other “pairs” trades if there’s an inter-city market that someone wants to see quoted.  Please contact me at johnhdolan@homepricefutures.com

Basics -CUS: Review of components/ Fair Value

I mentioned in my month-end report (click here) that the longer-dated CUS contracts were trading 1-2 points rich to fair value.  That prompted a question of “what’s fair value”.

The following table show that the  CUS (10-city) index is the weighted average of the ten component regional indices.  I believe that the weightings were created in the same process that scaled all CS indices to 100 (as of 1/31/2000).  Looking at the “Past CS Indices” columns one can see that the actual CUS number is the same as the weighted numbers.  This becomes important on revisions as, if say historical revisions caused WDC to come in 1.0 point lower than expected, the impact on CUS would be -.078.

Looking at the forward contracts, one can see that the CUS weighted values and the actual CUS contracts don’t trade (or even have to trade) at the same values.  While they will converge over time to maturity (assuming index weights don’t change) , there appear to be times when the CUS contract is bid above (or offered lower) than what I call the “fair value” of the weighted averages of the ten components.  For example, the mid-point of the bids and offers on the futures of the weighted components of the CUS index was 164.6 (as of this writing), while the mid-point of the actual contract was 166.4 -a 1.8 point premium).

In practice,it might be expensive (in terms of posting margin) to be long (or short) the correct weighted amount of the component pieces of regional contracts of the CUS index, against the CUS contracts, and there’s no guarantee that convergence will occur well before expiration.  I monitor this “fair-value” analysis, and have not seen any wide variations (beyond a few points) over the last year.

That said, I think that knowing whether the CUS contract is “fair-valued” might be a good trading tool as one looks for signs of sentiment and trading opportunities.

Basics -Calendar Spreads

Calendar spreads may be a useful tool for trading or interpreting the boundaries of HPA (Home Price Appreciation) expectations.

Using the 10-city CUS contract as an example I’ve put together an illustration (some are not real prices) of a series of calendar spreads.  The graph at the top show bids and offers in the CUS set of contracts,the middle table shows spread quotes, and the bottom table shows the implied HPA from each quote.

The first (and most important disclosure for trading in spreads) is that I’ve used numbers that represent the pay-up from one contract to the month.  So for example the Nov ’11/Nov ’12 offer is shown as 680.  In reality one would propose this trade by offering to sell Nov ’11 while buying Nov ’12 at MINUS 680.  That is since the first contract is the one that drives the spread, and you want to sell the front contract (Nov ’11)  lower than the back (or buy the back higher than the front) the spread would be quoted at a discount.  Note that I’ve shown the quotes as how much one would pay up (bid) for the forward contract (e.g. +100 in Nov ’11//Nov ’12) versus how much one would sell (Ask) the forward contract over the nearer one (e.g. 680 on the Nov ’11/Nov ’12 spread).   BE CAREFUL.

With that caveat, one can note that the implied bids reflect HPAs of less than 1% while the implied HPAs on offers range from 3.6 to 5.2%.  Longer term (e.g. Nov ’11/ Nov ’14) offers tend to trade at lower HPAs (reflecting some element of potential for up and down price movements over longer periods) while back contract single year offered spreads tend to trade at higher HPAs (reflecting uncertainty and the possibility of the return of a more robust housing market).

It may be possible to use spread trades to take a more conservative view on the timing and magnitude of future home price moves.  Note that the Nov ’11/ Nov ’14 spread quote is 1260 (1700-440) while the riskier outright Nov ’14 market (not shown) has a bid/asked spread of  2740 (18000-15360).

Finally, one last set of caveats.  The contracts are not trades where one can hold the spread trade through to the maturity of the longer contract – like a TROR swap.  (Total Rate of Return).   It may be obvious to some, but once the front side of the trade expires, one would be left with an outright position in the longer contract.  Therefore it’s important to consider not where home prices will go over the life of the back contract, but where expectations for home prices on the back contract will be, as the front contract moves toward expiration.

Basics – CUS 10 v CUS 20

A number of people interested in following the Case Shiller indices have focused on the 20-city index. While this is a broader index, the CME contracts are on the 10-city index.  Therefore, if you’re going to trade the CUS contract, it’s important to know the differences between the two indices.

While the CUS-10 index has many of the larger cities, it is not a blanket list of the top 10.    The list to the left shows that Detroit, Dallas and Atlanta are all excluded from the CUS-10, while smaller cities such as Denver and Las Vegas are included.    Nevertheless, ten cities comprising the CUS-10 account for more than 71% of the CUS-20.

The CUS-10 has outperformed the CUS-20 since the indices were benchmarked at 100 in Jan. 2000, with the CUS-10 valued at 159.36 (as of the July release of the May indices) and the CUS-20 at 146.43.   However most of that 11.7% outperformance came in the first four years.

Since Jan 2004 the CUS-10 index has declined 2.2%, while the CUS-20 has almost matched that with a decline of 3.5%.  The oft-cited woes of Detroit and Cleveland, that are counted in the CUS-20, have been offset by the strength of cities in the Northwest (Portland and Seattle.)

Furthermore, since the CUS-10 accounts for such a large percent of the CUS-20, it shouldn’t be surprising that the two move together.  Since less than 30% of the CUS-20 doesn’t overlap with the CUS-10, you’d need some pronounced movements in the remaining ten cities for the indices to diverge dramatically.

The other major difference (than size) between the two indices is kind of red state vs. blue state syndrome.  That is, the CUS-10 has three cities from the Northeast, and three cities from California.  The “other” ten cities in the CUS-20 index tend to be more Mid-America with exposures to the Southwest (Dallas, Phoenix), the Southeast (Charolette, Atlanta, and Tampa), and a broad definition of the Mid-West (Cleveland, Detroit and Minneapolis).

Any pronounced difference in performance between the CUS-10 and CUS-20 index would have to be based on these two features: size and location.  Given some extreme risks(earthquake, terrorism, rising sea levels) one might find fewer risks in the CUS-20 index.  On the other hand, as globalization continues, or foriegnors look to invest in US real estate, the larger cities might outperform.  While the smaller cities might have more low-income borrowers, at least there’s lending going on to non-jumbo clients.  Who’s going to lend $1mm on a starter home in Palo Alto?

Net, I’d be surprised to see big differences over the next few years.

Basics – CUS Calculation

It might be useful to walk through the calculation of the CUS (The 10-city Nationwide) index once, as the index presents an opportunity for possible trading strategies.  To start, the table (below) lists the weights of the index and shows the weighted average price of the 10-cities for the May CS release.  (Weights are from S&P report on Case-Shiller index archived here under reports tab.)  Thankfully, the weighted average for this exercise equals the published index result.

 With these weights in mind, one can attempt to trade forward values of the index or the key underlying cities in an attempt to take advantage of discrepancies, trends or relative liquidity.  For example note that two cities (NY and LAX) make up more than 50% of the index (weighted by price index).  Changes in those two cities alone may dominate the value of the CUS -particularly if others (say Denver) remain relatively quiet. 

Recently NY and LA have been moving in opposite directions (NY one of two cities that fell in value last month) while LA, and the West Coast cities of SF and SD that in total make up 40% of the index by weighted average, have been the stars.   Those offsetting effects have somewhat dampened price moves in the CUS.  As such there may be trading opportunities if the bullishness of certain markets spills 1:1 into the CUS index while NY lags.  However should California and NY ever begin to move strongly together (up or down) look for the CUS to become more volatile.