inter-city – HomePriceFutures.com

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.

Observations from past home price declines -how they might impact CME Case Shiller futures today.

I’ve compiled a table of home price changes over the last two large downturns (the post S&L crises, and Great Recession), and the current cycle, that should be of interest to people trading home price indices today. I’ve also posed some questions (below) that people trading CME futures, or academics looking for ideas on research papers, might consider. Now, I’m not saying that home prices are headed lower (although several contracts are inverted, i.e. with lower forward prices than spot), but if the market does turn lower, past home price declines might shed some light on how the next downturn might play out.

The table shows the Case Shiller SA (seasonally-adjusted) numbers for three cycles: 1987-1993, 2000-2012, and 2011 to today.^1 (Note that the dates are the end of the reference period, not the month the index was released. As such, the most recent month is October 2018. Also, note-I realize that the font size in the table is small. A copy of the table has been posted in the Reports section, which can be accessed here.).

The table is divided into two sections: at the top are the eleven areas that have contracts that are traded on the CME (the 10-city index and the ten component regions), and then, below them, the ten other areas that make up the Case Shiller 20-city index (that would have to be traded OTC). I’ve shown the minimum, maximum and subsequent minimum value for each index over each cycle. I’ve then calculated the percentage gain during the rally, and the subsequent percentage loss on the declines.

I’ve also shown the length of each up and down cycle denominated in months. Note that several CS indices (in the “other 10”) were not introduced until after Feb. 1987, so the percentage gains, as well as the length of the rally, may not reflect home price moves over a cycle comparable to other indices. I’ve italicized those results as the CS time series didn’t all start in Feb 1987. Note also, that that there wasn’t a CS index for Dallas for the first cycle.

I’ve further highlighted the top four largest percentage price gains and declines after the peak of each cycle (with the biggest gains in green and the biggest declines in red). (Note that only 3 of the 21 indices have a peak date other than the most recent coverage period, i.e. Oct 2018).

I’ve included a column (in grey) that shows the % difference between the peak value in the current cycle, with the highest value in the 2000-2012 series.

Finally, I’ve added (in yellow to the right) the mid-market value of the CME X20 (Nov 2020) contract vs. the spot index value. Here I’ve highlighted the two contracts that are quoted at the highest (percentage) value versus spot (so, BOS, LAV, with DEN close behind) and the two contracts with the lowest value versus spot (so SDG and SFR, with CHI and LAX just below). Note that the SDG and SFR contracts are down even more from the peak in prices in this cycle, as spot levels are already below peak prices.)

What to make of all of this? I’ll offer some points here, and more in follow-up blogs, but would be thrilled if others weigh in with comments to my email address (which I might incorporate into future blogs).

The 1987-1993 home price downturn did not impact every region. That is, many regions (at least 9 of 21) saw prices increase right up through Jan. 1993 (the end of my measurement period). That prompts the question as to whether a future downturn will be large enough to hit all areas (as it did in 2006-2012), or small enough to only hit selected areas that may suffer from local issues. Incumbent in that question is whether there are large forces in place that will drag all markets down (e.g. a spike in interest rates), or only certain markets for selected reasons (e.g. reduction in deductibility of SALT), population shifts, decline in local wealth (e.g. Silicon Valley), and/or affordability. Will fear of seeing price declines in one area, prompt users to hedge in their area? Net, there should be lots of opportunities to debate relative forward outlooks via inter-city spread trades.
The peak in prices in the first cycle (of those that saw a decline by Jan 1993) varied from May 1988 (in New York) to Sept 1991 (in Las Vegas). The same was true for the second cycle where BOS peaked in Nov 2005, but Charlotte didn’t top out until Aug 2007. As such, one question (related to the above) is whether the declines that we’ve started to observe could be unique to those areas, or precursors to drops in other areas .
For those areas that did see downturns, the period until prices hit bottom was drawn out (in both cycles). Bottoms were even more spread out across regions with Denver hitting bottom in Nov 2009 (after selling off <12%) while 3 areas waiting until March 2012. Downturns averaged about 2/3rds of the time measured (since Jan 2000) but the rallies would be even longer (and bigger) from the absolute bottom in prices. (I may go back to start middle series at past low in next iteration). These points might impact shapes of forward curves on CME futures. That is, if there are price declines in 2019 (and if they are relatively small) when might we see prices later pick up. This may play out in calendar spreads for 2021-23.
Those areas that saw the greatest increase in prices (in 2006-2012), also saw the greatest collapse.^2
Those that saw the greatest decline in the 2000-2012 period have been some of the best performers this cycle (going from just being oversold, or something else?). Examples include Las Vegas (+109.6%), Miami (71.8%), Phoenix (87.3%). What factors drove those markets higher in the last cycle, and how likely will those factors be replicated in this cycle (even assuming that a decline has begun).
While some areas are up sharply off the prior lows, they have not gone far past the prior peak For example, Tampa and Los Angeles are up ~70-75% from the lows, but below prior peaks. By contrast, Chicago, Las Vegas, Miami and Phoenix are still below past highs, while Denver and Dallas are up about 50%. How much should gains over past highs factor into forecasting possible future selloffs? Will homeowners in the area with large gains be more prone to hedge (and less concerned about execution price) than those who’ve seen much smaller gains this cycle (e.g. New York, Cleveland).
The West Coast includes three cities that have already come off their highs in this cycle: San Diego, San Francisco, and Seattle, as well as the regions with some of the largest gains (e.g. Los Angeles +~75%, San Diego +~70%, San Francisco +~109%, Portland +77.3%, and Seattle +91.8%. Was there a China/Asian effect in play (particularly once Vancouver started taxing foreigners?) Will these areas be disproportionately impacted if the Chinese economy slows? What other factors may have driven California home prices to such highs (and are those reversible)? What should be the impact on volatility assumptions for options -both outright and relative to other regions?
Some areas that came through the 1987-1993 cycle unscathed (possibly due to population inflows?) -e.g. Miami, Las Vegas, Phoenix – were the worst performers in the Great Recession cycle. Some have argued that these were areas where sub-prime lending had a large effect. Without subprime lending today (but not ignoring FHA’s role) are these areas likely to perform better this time?

All of the above topics are of interest to me in quoting CME futures and OTC trades.

Trading in CME futures has historically picked up when markets turn (e.g. 2006-2007 and 2012) so I’m hopeful that we’ll see it this cycle. I can’t think of a better public, pure-play for financially expressing a view on forward home prices, than the CME futures and options contracts. That said, given the curve inversions, and volatility of certain regions (most notably on the West Coast) I expect current traders (including me) to be more defensive as the current situation evolves. This market will need more involvement – particularly from the long side – to avoid becoming overly one-sided (e.g. all hedgers looking to sell at the same time). CME prices are currently consistent with HPA gains several percentage points below those expressed in surveys and home price forecasts. There may be an opportunity for those with such views (and their readers) to add home price exposure, at what they might argue, are attractive levels.

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

Thanks,

John

^1 I don’t often used the SA series, but I wanted to pick out highs and lows, and was worried that seasonal factors might hide a key intra-year value.

^2 Note issues with calculating percentages, e.g. LAV went from 100.4 to 235.76, for a 135% gain, but then fell through the starting point to 90.52 for “only” a 61.6% loss.

Recap of activity in CME Case Shiller futures for July

I just posted an 18-page recap of (the very limited) activity in the CME Case Shiller futures for the month of July. There are pages with tables of recent outright prices, and price changes, calendar and intercity spread quotes, indicative option prices, and volume and open interest (OI) figures. The recap can be found in the Reports section (along with some background material and historical reports) or can be linked here.

The key points from July report include:

–There were 5 futures contracts traded in July in 2 regions (DEN and SFR) across 3 expirations. (4 of the 5 trades were in SFR contracts). Volume has been very low for the last 12 months, but with more commentary on social media about a bubble, and ever-tighter bid/ask spreads, I remain optimistic that trading volume will increase dramatically.

– There were no options trades. The recap has a page showing where I’d be open to buying/selling puts on one-year forward, at-the money strikes (but recall that any options -both puts and calls -can be arranged for any region, for any expiration, on any 5-point interval). I’d be happy to respond to any option inquiry and/or to tout any “trading axe” that a reader wants to share.

–Despite low volume, activity (third parties bidding and offering) picked up, especially in SFR. The SFRX22 contract had at least 3 parties bidding and offering, and was quoted much of the month with <3 point bid/ask spread.

–For July, bids and offers were higher across many regions (except DEN, NYM, and SDG).

–There were 2-sided quotes in all 121 contracts, for most of July. While most quotes are 1×1 (one lot bid vs one lot offered), I’m open to facilitating retail-sized inquiries (up to 10 lots) in any contract. (A benefit of two-side trades is the resulting graphs showing YOY implied price changes). I’m preparing a blog for later this week detailing observations on forward implied YOY price gains/HPA, with a focus on opportunities in calendar spreads.

–Bid/ask spreads tightened slightly across all expirations. Spreads on the front contract (Aug ’18) are just over 1.0 point (about normal with one month to run), while bid/ask spreads on the Nov ’18 contract (which has been my benchmark contract for the last year) are tight at 2.0 points. The CUS, DEN, and SFR contracts have the tightest bid/ask by region due to recent trades and interest from other traders. By contrast, LAX, SDG and WDC (all regions with low OI) have the widest bid/ask spreads.

–OI on futures rose from 39 to 44. There are three regions (BOS, MIA and WDC with no OI. I’d be eager to accommodate any trade in those regions.)

–Home price index futures for Paris are still on schedule to be rolled out this fall. Key to the Paris contracts is much more narrowly defined geographic reference region. See tab “Paris Futures” for more details.

–I’ve received inquiries on hedging Seattle risk, which since not listed on the CME will require an OTC trade. Seattle presents an interesting trading opportunity as it’s had some of the highest home price gains, but some worry about a bubble. I’m looking for OTC counterparties for either forward or option OTC trades.

–Additionally, with so much interest in SFR, I’d like to hear from any looking to engage in an SFR options trade (put/call –either side.

Please 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

Recap of June CME Case Shiller Futures -June 2018

A recap of activity in the CME Case Shiller home price index futures has been posted to the Reports section. You can click here to access. The recap includes end-of-month prices, and price changes for the last month, tables on volume, open interest, intercity spread and calendar spread markets, as well as suggested one-year put option quotes.

Additionally, a few new pages have been added to the Reports section to include: Volume in Case Shiller futures since 2006, Open Interest since 2006, and graphs linking historical Case Shiller data with contract prices, for each of the 11 regions. In addition, the mid-June regional review had suggested option pricing for multiple strikes and expirations by region.

Here are the key point from the recap:

–There were 15 futures contracts traded in June in 3 regions (DEN, LAV, and SFR) across 5 expirations. There were no options trades.

–Activity picked up with especially in SFR with 9 trades and the tightest bid/ask spreads. The SFRX22 contract was quoted much of the month with <3 point bid/ask spread.

–For June, bids and offers were higher across many regions (except NYM, which fell ~2 points). Much of the move took place after CS #’s were released on June 26th.

–For the first time in a few years, there were 2-sided quotes in all 121 contracts.

–Bid/ask spreads widened slightly across all expirations.

–Longer-dated contract bids rose, raising implied HPAs, albeit from still very low prior levels.

–OI on futures rose to 39. There are three regions (BOS, MIA and WDC with no OI.)

–Home price index futures contract for Paris to be rolled out this fall.

–I’ve received inquiries on hedging Seattle risk. Looking for OTC counterparties.

–Added to Reports website section – Vol/OI since 2006, price graphs on all contracts

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

Thanks, John

2018-Year end Case Shiller values/ See Feb ’19 (G19) CME contracts

The CME Case Shiller home price index futures provide a potentially useful platform for hosting the debate of “how much will home prices rise in 2018”. That’s because the Feb ’19 contract settles on the Case Shiller index values announced that month, which are the December 2018 values with the (Case Shiller index methodology) lag of 2 months. Since the contracts cash settle, contracts prices should converge to expectations about those year-end index values.

Note prices can deviate from expectations before settlement for a variety of reasons, with an imbalance of orders, or thinness of market, being two likely reasons. That said, someone who has a strong view about 2018 home price changes might be able to employ these contracts to take a position on either the Case Shiller 10-city index, or any of the ten regional components.

The graph below shows the bids, offers, and mid-market values for the 11 contracts converted into percent differences versus the respective Case Shiller Dec 2017 index values. For example, the BOSG19 (Feb ’19) contract was bid 216.6 and offered at 219.4, versus the Dec 2017 value of 204.73. The bid is 5.8% higher, and the offer is 7.2% above the Dec ’17 index values. The size of the bar represents the bid/ask spread (in percentage terms), while the height of the bar represents which areas are priced at levels consistent with above-average performance (e.g. LAV and SFR) or below-average performance (e.g. CHI, NYM and WDC).

The table below the graph shows mid-market pricing (bid+ask/2), HPA gains in 2017, and the ratio of 2018 pricing versus 2017 gains. Note that even though LAV and SFR are priced to have the highest gains for 2018, the implied HPA is lower than 2017. Similarly, while CHI and WDC are priced at levels consistent with lower than average gains for 2018, that those gains are higher than last year. Net, regional prices (at least as represented by CME prices) are converging…slightly.

While this chart, and trading in these contracts, may be useful, the big qualifier is that there is no open interest in any of the Feb ’19 contracts (and not much trading in the other expirations). I’m eager to facilitate any retail-sized inquiries on these contracts to foster debate on the question posed above (i.e. where are home prices headed in 2018?). Any prognosticators with outlier views (bullish, or bearish) might consider steering their readers here as I can’t think of a better pure play on home price expectations.

Finally, I’d note that while contracts can be traded on an outright basis, the CME allows trading in intercity spreads (a form of relative value trading). That is, one can, for example, go long NYM and short WDC (or any other permutation) simultaneously at a pre-determined spread. (See Oct 7, 2017 blog –UBS Outlook- Using Calls, Intercity spreads to express views, or Feb 6, 2013 blog – Intercity Spreads -How to read them, for examples/explanations.

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

Thanks, John

Recap for March – CME Home Price Index Contracts posted

I’ve posted a recap of activity in the CME Case Shiller home price index futures (and options) for March in the Reports section (or you can link here). The report contains tables of prices, price changes, graphs of historical and forward prices, and quotes on inter-city and calendar spreads. Implied HPAs are shown for all 11 regions as well as open interest and historical volumes.

March was another quiet month (but busy in my “day job”). Highlights from the month include:

–There were 9 futures contracts traded in March in 3 regions (HCI, CHI, and SFR) across 3 expirations. There were no options trades.

–Activity remains slow with most bid/ask activity in the SFR contracts.

–For March, bids and offers were higher across most regions (except lower in CHI, WDC). Bid/ask spreads were flat across expirations.

–New front contract (K18) bid/ask spreads are wider than typical, given two months to expiration. California contracts quoted at widest b/a.

–OI on futures rose slightly to 33. OI on options unchanged at 2.

–Forward implied HPA are rising as gains in March were reflected in stronger bids on calendar spreads. (Still my sense is that forward prices are biased lower by an imbalance of hedgers vs. natural longs).

–Growing interest from option buyers.

–New home price index futures contract for Paris to be rolled out this summer.

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

John

CME Market reaction to CS #’s (Jan 2018 release)

Quotes on CME Case Shiller home price index futures were generally higher on Tuesday, albeit with wider bid/asked spreads, following the January release of the Case Shiller #’s for November. As highlighted in table below, the big movers were the California contracts (w/ SFR much higher, and SDG lower) and CHI (much lower). (Note, I’m using the Nov ’18 – X18 – contracts for illustration. In general price movements were of a similar direction along the expiration curves, with longer-dated contracts, particularly SFR offerings, moving more than shorter-dated contracts.)

There were 3 trades -an outright CHI trade, and a CUS (10-city index)/CHI Intercity trade (that showed as two legs).

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

Thanks, John

Revisiting ways to play the impact of a lower “Mortgage Interest Deduction” (MID

I had previously written about possible ways for market participants to play the impact of the prospects to changes in the Mortgage Interest Deduction (MID) in a blog on Oct 21 . Since this remains a timely topic, I again want to offer two opportunities for fans of the NAR’s (National Assoc. of Realtors) views, on how they might play the pending collapse in home prices in the higher- home price areas that have historically taken advantage of MID.

The first would be to enter either an OTC spread trade, or a total rate-of-return swap (TROR) on the difference between the performance of the Case Shiller 10-city index and the Case Shiller National index over some time frame. The CS-10 index contains many of the areas with higher-priced homes (e.g. NY, San Fran, Los Angeles) while the National index covers a much wider cross-section of the country that includes many lower-priced homes, where borrowers would presumably be less impacted by a cut in the ceiling in the amount of mortgage debt subject to the MID. The graphs to the right show the index values for the Case Shiller 10-city, 20-city and National indices (on top) as well as the year-over-year percentage changes in the indices.

Note that while the 10- and 20-city indices did much better in 2013, that the National index has recently been outperforming the 10-city index (i.e. 6.07% vs 5.33% for the last year, as of the October Case Shiller numbers released in Oct.) I would be open to an OTC trade on the differences between the index levels one-year forward (currently 216.5 on the 10-city index and 195.1 on the National index), or on the difference in percent gains (currently 74 bps) on the YOY gains in the National versus 10-city index.

While the above speaks to possible OTC trades, one can also take a more targeted view (by area) on existing CME products (i.e. Intercity Spreads). That is, one can “bet” on the performance of a particular regional index versus the Case Shiller 10-city index, if one truly believes that the areas with the highest priced homes will suffer relative price declines with the lowering of the cap on mortgage interest deduction.

The table above lists six regions that have both larger than average home values (using the Zillow ZHVI) as well as having regional CME Case Shiller futures contracts. (Note that while Zillow and Case Shiller geographic regions are not a perfect overlap, the ZHVI index does a good job of comparing the average prices to their national average. By any measure these six regions have higher-priced homes.)

In addition to a trader just outright selling the NYMX18 or SFRX18 contracts (X18= Nov 2018), they could also enter into an Intercity Spread trade where they simultaneously buy one contract and sell the other (in this case the CS 10-city index contract -HCI). This might be a more conservative play than just an outright sale as the end result will be a function of the difference between the two indices referenced in a trade. These IC contracts are listed where the bid side shows the price difference between where one might buy the HCI contract while selling the regional contract. So, for example, the -29.6 bid on HCI/SFR-X18, displays the bidder’s willingness to buy the HCIX18 contract at 224.8 while selling the SFRX18 contract at 254.4.

Note that the 224.4 price on the HCIX18 contract is 3.84% above the current spot level (of 216.49) while the SFRX18 price of 254.4 is 4.47% above the SFR spot index of 243.52. In effect, were one able to execute this IC trade on the bid side, one would be selling the SFRX index (for Nov 2018 settlement) with higher priced gains over the next 13 months, than the HCI index by 63 bps.

(The analysis in blue, shows the relative differences were a buyer to pay the offered side, in this case -28.0 points on the IC spread).

Note that if one were able to buy the IC spread on the bid side, they would be entering the trade at levels where in 5 of the 6 cases, the regional contract would be sold at a level with implied gains, higher than that of the regional contract. (The NYM contract is priced for lower price gains than the 10-city index).

Even if one bought the IC spread on the offered side, they would still be selling the BOS and DEN regional contract with higher priced gains than the HCI contract.

I am open to facilitating inquiries (or trades) on small amounts of such IC spreads to prompt further reaction to the MID debate. 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.

Sept CME Case Shiller Futures/Options update -27 trades

I just posted a recap of activity during September in the CME Case Shiller home price futures (and options) contracts. You can find the recap in the Reports section or link here. The recap cover 27 pages and includes an updated section where information unique to each regional contract (e.g. graphs, prices, volume, open interest, implied HPA and suggested put offering levels) are presented on a separate page for each region. (See example below).

The highlights of the report include:

–There were 20 futures contracts traded in Sept across 5 regions and 6 expirations on 7 dates.

–Bids and offers generally rose across most regions and expirations (except MIA), particularly after Sept 26 CS #’s.

–Bid/ask spreads tightened dramatically, particularly in longer contracts. However, spreads remain wider-than-normal in front contract (~2pts).

–There were bids in all 121 contracts, and two-sided quotes in all contracts out to Nov ’18, and then X19 and X20.

–OI remained flat at 45 as several trades appeared to be unwinds.

–For example, close out of SFRX20 open interest led to wtd. avg. of OI to drop from 1.20 years to 0.92.

–OI remains very concentrated in November expirations (82%).

–There were 7 option trades, again in DENG18.P2000.

Please feel free to review and share (via sending links) the recap. Feel free to contact me (johnhdolan@homepricefutures.com) to discuss the themes addressed in this report.

Thanks, John

A full set of Inter-city spreads for Nov 2018 contracts

I’ve filled out prices for intercity (IC) spreads on all ten regions (vs. the CUS 10-city index) for the Nov 2018 contracts.

IC spreads are important as they allow viewers another way to see which regions are priced at levels that are consistent with a region out-, or under-performing the 10-city index. Traders can also use them to express a view on relative performance of a region vs. the 10-city index (or between regions) by entering into a simultaneous long position on one contract and a short position on a second at a pre-negotiated spread, without making an explicit view on the absolute levels of index levels in the future. (1)

I’ve converted the IC price quotes into implied relative percentage gains of one index versus another.

(For those reading about IC spreads the first time, I’d advise you to review my introductory blog on IC trading).

For example, the DEN contract has one of the highest implied price gains. The IC dollar spreads convert (using my approach) into levels where the bidder is willing to buy HCI/sell DEN at a 3.6% discount, while the seller is proposing the opposite trade with HCI at a 2.0% discount.

The IC contracts that are priced where HCI under-performs a regional index include DEN, LAV, MIA, and SFR. The IC contracts that are priced where HCI outperforms the regional indices include CHI, LAX, NYM and WDC. The BOS and SDG contracts straddle HCI performance.

I’d be open to hearing your views on the relative implied forward differences in HPA on the ten contracts. I’d be happy to facilitate any modest spread trade on the quotes shown hear, or on regional pairs (e.g. BOS vs NYM, LAX vs. SDG).

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions or trading axes.

(1) A caution -IC spreads do not remove outright risk as the notional values of contracts varies by region. I’ve tried to address that in the past by agreeing, for example, to buy 3 LAX while selling 5 CHI.