Denver – HomePriceFutures.com

Basics _Bid Ask spreads for Case Shiller futures contracts

My last blog talked about which contract expirations get most of the (limited) trading. This one shows (see table below) where the tightest bid/ask spreads are (today). That’s important as the markets with the narrowest bid/ask spreads tend to be the ones with the greatest likelihood of a trade. After all, if a buyer and seller are 4 points apart the difference may be too much to surmount, or there may not be market events that would cause a buyer or seller to change their price so much very quickly. However, a market with a bid/ask spread of 0.20 points (the minimum price move) might result in trade should either side (assuming that the bidder is not the person offering) should either party changes their mind even slightly.

The table also shows that there are two-sided markets in all contracts out to Nov 2017, but after that only in a few contracts (ones that I think other traders might have an interest). (Note that a new Aug 2017 contract will appear when the Feb 2016 contract expires.)

The two tightest bid/ask spreads (by expiration) are highlighted in green, while the two widest are highlighted in red. I try to keep the CUS (10-city index) as always one of the tightest bid/ask contracts as CUS contracts are of national interest and they can be used as one side of Intercity (IC spreads). Bid/ask spreads are shown in points, so lower-priced contracts (e.g. CHI) might show up as one of the tightest contracts, but not necessarily on a percentage basis. Conversely, any higher priced contracts that show up on the tightest list, will be even more relatively tight on a percentage basis.

Bid/ask spreads tend to widen the longer the time to expiration, but not uniformly. As I’ve noted in other blogs the November expiration contracts are outstanding the longest, are the only contracts for hedging 3+ years, and thus tend to have the most open interest and tightest markets.

Some contracts might have wider bid/ask due to volatility (e.g. SFR) but some are wider just because they don’t seem to get much interest (e.g. DEN, and LAV).

I’d appreciate any help in narrowing any of these spreads with bids and/or offers or feel free to “adopt” one contract (or region) and make the markets yours.

Feel to contact me (johnhdolan@homepricefutures.com) if you like to chat about this table.

“Gauging Confidence in US Housing” Pulsenomics, Scatter Diagram

I continue to be a fan of the work done at Pulsenomics regarding the use of surveys to gauge sentiment related to home prices (either among forecasters, or home owners). The Pulsenomics quarterly survey is (IMHO) the best survey of forward home price expectations by those in the business of making forecasts (to include, in the interest of full disclosure, myself).

Recently, Cityscape published a detailed report where Pulsenomics founder Terry Loebs describes both the methodology in calculating the Pulsenomics Housing Confidence Survey. It is recommended reading for anyone looking for views of homeowners (and renters) toward many questions, including homeowner confidence.

The report may have particular use for those following the CME Case Shiller futures as the results are tallied for the 20 regional components of the Case Shiller 20-city index. Since ten of those indices have contracts traded on the CME, one might be able to use the survey results in their trading.

I’ve taken a first cut at comparing survey results against CME markets here. The table to the right takes a portion of the results in Exhibit 2 (using only those cities in the CUS 10-city index). (I’m only using the homeowner confidence index, but there is larger set of results that includes renter confidence. Readers are encouraged to look at the entire report and see how use of other data might impact results.)

To the Pulsenomics results I’ve added the CME trading symbols, the gain in the Case Shiller index for the last 12 months, the spot Case Shiller index levels, the bid and offer for the Aug ’16 CME contracts, and the difference between the mid-market level of the Aug ’16 contract and spot levels. (I used the Aug ’16 contract to minimize seasonal levels. Ideally, I’d like to use a longer-dated contract, consistent with longer-dated expectations, but wanted to avoid seasonal issues. In addition, many of the Aug ’16 contract prices are mine, so caution is advised as I’m evaluating my own inputs. That said, anyone who wants to narrow the Aug ’16 bid/ask spread, or to challenge the bids and offers, is encouraged to post prices. Hopefully the following results might prompt some such reactions. Also, I use the Case Shiller indices as those are the references for the CME futures. Pulsenomics tends to focus on the Zillow indices.)

I then took the Pulsenomics Homeowner Confidence Level and contrasted it versus the mid-market implied gains for the Aug ’16 CME contracts to see if confidence levels are correlated with higher home price expectations.

The scatter diagram suggests that confidence levels seem to be generally correlated with one-year forward gains. For example, CHI has both the lowest confidence level as well as CME Aug ’16 prices with the lowest implied gains, while SFR has one of the highest confidence levels and highest CME price gains.

The outliers (e.g. DEN, WDC in particular) might be worth evaluating more thoroughly. DEN does have one of the stronger improvements in confidence levels over the last year, so momentum might play a role there, but WDC has both one of the weakest trailing 12-month gains in the Case Shiller index as well as only modest 6-mon and 1-year gains in confidence levels among homeowners (as well as weak gains among renters (not shown here)).

Might WDC CME Aug ’16 prices be too low, or might confidence levels be too high? I have no strong views BUT am very happy to accommodate anyone looking to debate the topic, and/or to trade WDC (or any other) futures.

Please read the entire Citiscape report and/or feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions.

WSJ- Bidding Wars Back for Homes

I encourage all readers to review today’s WSJ article titled “Bidding Wars Back for Homes“. While the title draws from the anecdotes of buyers paying ever-higher premiums over listed prices, the meat of the article is a table from Realtor.com showing how little time houses stay on the market in “hot markets”. The middle column emphasizes that hot markets are getting even hotter.

So what might the prospective buyers have done differently (he asked in a rhetorical, self-serving way) OR, since this is a column on use of futures, what might someone looking at this as a temporary phenomenon do?

The graph below shows the daily closes for the DENX15 contract. The contract closed at 167.0 on 12/31/2014 and today is quoted 176.0/180.0. That’s a gain of 5.4% or $250/point = $2250/contract had someone been able to buy the DENX15 contract at 167. Since one contract has a notional value of $250* index price, at 167, each contract was worth ~$41,750. Those readers looking to buy a $417,500 could have (in theory) bought ten contracts giving them $22,500 that could have gone to pay for a higher purchase price.

If effect, future first-time buyers of homes (so ignoring those who were trading from one to another) were un-hedged. As with any un-hedged future user of a product (in this case real estate) they could have hedged their exposure by buying forward index contracts.

Most hedging examples focus on situations where someone is long an exposure that they want to reduce. However, the above example shows how someone who has less exposure than they want (whether a single home-buyer or an institutional investor) could (in theory) remedy their situation buy buying futures.

A more classic hedging example might be for those who are long real estate, or for a builder who wants to build homes for sale 2-3 years from now, but who wants to reduce the risk of where prices might be in 2017-2018.

Prices for DEN contracts are consistent with higher Case Shiller index levels over the next few years. The DENX17 contract has a 192.0 bid which is ~15% higher than today’s spot index level. So, someone looking to hedge DEN exposure, or wanting to bet against such implied gains, could short DENX17 contracts.

While I’ve focused on DEN, the same analysis can be done for each of the ten Case Shiller 10-city indices in futures trades, or on other indices in OTC trades.

Now the qualifier that I’ve used throughout this blog (“in theory”) is an important one as there has been near zero volume for many contracts over the last few months. That said, I think that the CME &P Case Shiller futures contract is the best public platform for viewing, or expressing views, on forward home prices.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions, or if you have a trade idea that you’d like to propose, or have me share with other readers.

CME Futures -Post April CS #’s

Prices of CME housing futures were generally higher after this morning’s release of the February Case Shiller indices.

By the close, prices moved higher (as measured by mid-market levels) in 9 of the 11 contracts (all but BOS and LAV). Advances were lead by the 3 California markets (and Miami). (Note that the SFRX15 price of 218.0 form April is a quote from a the 26th. There was no offered quote at the close of the 27th. Note also that the CS index history does not include any revisions posted today).

In several cases offers moved up much more than bids, resulting in wider bid/ask spreads 7 contracts. Much of the spread widening took place in the X16 and X17 contracts as bid/ask spreads for the HCI X16 and X17 contract widened. The X16 contract is one leg of several IC (intercity spread) orders so wider HCIX16 quotes spilled into other regions. (Note: this is the first time over several months that HCIX16 closed with wider than a one point bid/ask spread. I could use some help tomorrow on that single contract.

There were trades across the three front CHI contracts and the first two HCI contracts. There was a flurry of quote changes in CHI and DEN so those might be the two likeliest contracts to trade tomorrow.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions.

Basics: What If CUS Index composition weights change?

The weighting for Case Shiller composite indices (e.g. CUS 10-city, referenced in the CME contracts) may be adjusted 2- 3 years after the 2010 census, per the Case Shiller index methodology. I raise this notion to: 1) increase awareness, 2) minimize concern, and 3) invite those who better understand index calculations to weigh in. I have no idea if, or when, this might happen, but as it might have an impact on CUS values, I wanted to start a (more public) discussion.

As a test, I used the changes in population for loosely defined geographic regions to try and estimate what the new weights might look like and how those changes might impact CUS values. I made the simplistic leap of faith that population growth is correlated to housing stock, which I believe, will be the denominator for assigning weights by region. The analysis is not intended to be precise but to illustrate some key moving parts in how a change in weighting might impact (if at all) the CUS index.

The population gains are primarily in the West (DEN, LAV, LAX, SDG and SFR) and South (MIA) while the losses are in the North (BOS, CHI, NYM). The WDC region bucks the Northeast trend. Given my “What If” weights, the CUS index would be impacted in this analysis by -0.18.

The reason that an adjustment (using my “What If” weights) is so small is that weighting is taken away from NYM (which trades at a fairly close level to the CUS index) and redistributed to both the low priced index areas of LAV and DEN (which would pull down the CUS value) AND the high-priced areas of SDG and WDC.

(Note that any change in the allocation to SFR should have a small impact on spot CUS values as both indices have about the same value. However this (a change in redistribution to SFR) would not be neutral to longer-dated contracts where SFR contracts trades at a premium to CUS.)

Key to any estimation/conclusion is how future index weightings might vary from this simplistic analysis. Changes from/to the low index areas (DEN, LAV) to the high-priced index areas (LAX, WDC) might result in more pronounced changes to CUS.

Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss this theme, or any other aspect of trading home price indices.