inter-city – Page 2 – 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.

Basics -Distribution of Trades (by Expiration)

In preparing to write an upcoming blog on “trading in expiring contracts” I first wanted to check to see whether my intuition that trading volume was concentrated in the front contract, was borne out by the numbers. While there is probably a more comprehensive database at the CME of all trades, I decided to first check with my own trades. Since I’ve been market maker for 5+ years and have been involved in the majority of trades, it seemed likely that my trades might resemble the universe, but I’ll concede that I may have trading biases (e.g. stick to/avoid/ front contract that may skew the results slightly).

I took my database of 800+ trades (by lot count) and tried to eliminate any trades involving one leg of a calendar spread where there was a buy and sell at the same price, on the same day. (That is the calendar spread combined with an outright trade may have facilitated an outright trade, but the simultaneous buy and sell of the same contract on the same day at the same price did not by itself indicate interest in trading a contract with that expiration. My intent was to only capture the outright trade).

The following table shows the distribution of 600+ trades grouped into months to expiration buckets.

While more than 60% of the trades (line -right axis) were on contracts within 12 months of expiration, trades within one month of expiration were <10% (blue bar-left axis). However, there does appear to be some front-loading to the trading in that ~40% of my trades were on contracts with <4 months to go (so typically the front contract) and ~85% of my trades were on contracts that expired within two years. Tighter bid/ask spreads in shorter expiration contracts (due to less uncertainty?) may have facilitated greater trading in shorter expirations.

To build volume in longer-dated (>2 years) contracts it seems that more effort needs to be focused on calendar spreads and inter-city spreads. I’ve tried to encourage such trading with X16/X16 calendar spreads and Intercity spreads across the X17 contracts, but those are all within two years of expiration.

That said, I’m heartened to see some outright interest in the HCIX18 contract. I’d encourage others (and will help) to use recent tightness in the HCIX18 bid/ask spread to contribute X16/X18 and X17/X18 calendar spread quotes, as well as X18 IC spread orders.

If you have any questions, please feel free to contact me (johnhdolan@homepricefutures.com) to discuss any such ideas.

Front contract bid/ask spreads tighter

Bid/ask spreads for the front contract (Feb ’16/G16) are tighter this morning. Hopefully this will prompt some discussion of (and trading in?!?) in front contracts. Note how seasonal effects are expected to kick in, resulting in some month-month NSA declines in index values.

Since Feb ’16 prices are linked to many May ’16 and Feb ’17 quotes, other contracts are also impacted. Narrowing the Feb ’16 quotes should also narrow the G16/G17 calendar spreads, which should help in YOY projections.

If anyone has a strong view on relative value (i.e. across regions) I’d be open to posting narrow intercity spreads.

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

Nov ’15: One week to go

With only one week to go before the (Tuesday, Nov 24th) release of the Case Shiller index results for September, I’ve taken a sharp pencil to tighten up bid/ask spreads in Nov ’15 (X15) contracts. Here’s a table of historical Case Shiller values and this morning’s contract quotes for the Nov ’15 CUS 10-city index and the 10 component regions. Recall that since the futures contracts settle on the CS index values announced next week, the futures should (in theory) reflect market expectations for what those 11 numbers will be.

Bid/ask spreads for the Nov ’15 contracts are all under 1.0, and average 0.67. The CUS (10-city index) contract is quoted at 0.2 difference (the minimum price move for these futures) while the SFR contract has the biggest bid/ask spread.

The dual impact of negative seasonal factors and declining HPA show up in ever smaller differences between last month’s Case Shiller indices and the Nov ’15 mid-market price levels. In fact, pricing on the CHI contract is consistent with a month-month decline in the non-seasonally adjusted index. (As an aside, year-on-year differences in futures prices still show implied HPA of 2-5% for 2015-2016, for all 11 contracts).

Annual gains (not shown) on the CUS (10-city index), as measured by comparing the mid-market value of the futures contract versus the index result for last year, are “expected” to be ~4.63% for the CUS index. Year-on-year gains should run between 1.8-1.9% on the low end (for CHI, NYM and WDC) to in excess of 10% (for DEN and SFR).

Over the last few years there have been occasions (recall that these futures expire quarterly) where the bid/ask either bracketed the actual Case Shiller index that was used to settle the contract, as well as times when the index results were outside the bid/ask spread in as many as 7 contracts. The possibility of a version of the second scenario (i.e. that futures are “wrong”) should have home price analysts comparing their model results versus futures prices looking for a money-making opportunity. At $250/point, the analysis seems worthwhile.

Recall that trading in the expiring contract stops at 3PM (NY time) on Monday. Other expirations will trade until 4.

Finally, as Nov ’15 goes into the record book, the CME will roll out a new contract for Nov ’20 expirations on Tuesday.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions related to this blog or trading of these contracts. The contracts tend to be quoted 1×1 (i.e. a bid for one contract versus an offer of 1 contract) but I might be inclined to trade larger amounts. In addition, intercity spread order are possible if you think that one region’s results will diverge from another’s very differently that current contract prices “suggest”.

Dispersion across forward Case Shiller indices

With tighter bid/ask spread, other traders weighing in with quotes, and a clear slowdown HPA growth, differences in forward price gains across the ten CUS-10 components are starting be more evident.

The bar graph below shows CME Case Shiller futures prices translated into percent gains versus today’s spot indices. The bottom of the column is the bid, the upper end is the offer and the hash mark on each contract is the mid-market value. The relative height of each bar reflects the size (in % terms) of the bid/ask spread. For example, the SFRX17 (Nov ’17) contract was quoted 235.4/239.6 or 9.1%/11.0% above the 215.84 spot index. The CUS-10 index contracts (shown here as HCI) tend to have the tightest bid/ask spreads, while lower dollar price contracts (e.g. CHI and LAV) tend to have the widest.

Since most interest is in the contracts out to Nov 2017, I’m showing the Nov ’15, ’16, and ’17 contracts here. Using the same expiration cycle (i.e. Nov) minimizes any seasonal distortions. The graph illustrates that contrary to any headlines touting declining seasonally-adjusted prices, that market prices are consistent with further (albeit small) price gains. (BTW -the lopsided interest in hedgers vs. the relative dearth of those looking to take synthetic longs might only tend to put more downward pressure on forward prices. Clearly, those looking for declines in home price indices can take advantage of the higher-than-spot prices in the longer dated contracts.)

Beyond the higher forward prices, those regions that have tended to have relatively stronger recent HPA (e.g. DEN, MIA, SFR) tend to have higher forward price gains, while those that have been relatively weaker (e.g. CHI, WDC) tend to have lower forward gains. Over the last two years, such higher forward gains were somewhat more difficult to discern, or trade on, as, for example, SFR bids were strong, but not necessarily through the CUS index. However, the combination of the HCI Nov ’16 and Nov ’17 bid/ask spreads being so tight, with improved (narrower) bid/asks spreads in many regions, one can more easily see greater regional dispersion of the ten CUS components.

One can see via this graph that, for example, not only are Nov ’17 SFR mid-market prices higher than Nov ’17 LAX prices, but that the bid for one contract (SFR) is higher than the offer for the other (LAX) (based on percent vs. spot terms). A key observation then isn’t that the market is priced such that SFR will outperform LAX over the next ~2 years, but that the market is priced such that SFR will outperform by ~2.5%

I remain very interested in fostering the debate (or better still, trading of) spreads where one can express a view on implied forward price gains of any one region (so calendar spreads) or implied forward gains of one region vs. another. (i.e. intercity spreads). There are numerous intra-regional trades (e.g. BOS v NYM or NYM v WDC in the Northeast or LAX v. SDG, LAX v. SFR in California) that one could debate, as well as the performance of any region vs. the HCI contract (on the 10-city index).

Feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to stir the pot on this conversation.

If I live in Chicago, I live in Illinois….could that be a problem for home prices

I have a side interest in public pension plans so the news from Chicago over the last few days (that Illinois is struggling to deal with one of this country’s most underfunded (as a %) pension plans NY Times article and that Chicago debt was downgraded to junk Chicago Sun Times article) was not a surprise, but a wake-up call/reminder that underlying financial trends may have long-term secondary consequences. In the end, for Chicago to place debt going forward, it would seem that either pension benefits have to be cut, other budget line items reduced, or revenue raised (as Chicago, unlike the US Government, can’t print currency).

Now even if only one of the three categories could solve Chicago’s fiscal woes (and I doubt that), I’m not going to suggest which is more likely, or “right”. I would highlight to readers here that revenue increases are often associated with higher taxes, and that taxing things (or activities) that are captive are often viewed attractively by those charged with raising revenue. That leads me to a concern about home prices in the CHI index over time. (After all, wage earners, companies, and shoppers can move to avoid personal income, corporate and sales taxes).

Now I don’t often express market views, and clearly what’s taking place in Illinois is not unique (California has similar pension issues and both LAX and LAV are dealing with potentially crushing water issues). However CHI may reach a level (similar to upstate NY) where real estate taxes become a higher cost to homeowners than their mortgage! The combination of a 4% mortgage (on 80 LTV) plus 4% tax rates (on 80% assessed values?) might present of formidable headwind against the ~15% gains implied by CHIX17 prices.

I would imagine that much of the CHI index gains (as with other regions that experienced distress) over the last few years has been a function of the % distressed being sold at deep discounts dropping. Gary Lucido’s Getting Real blog is great source for following the CHI real estate story. This graph to the right is from his blog and is shown here to illustrate how far the “% distressed sales” have fallen. Can it fall much further, and if not, might the absence of that tailwind show up in lower HPA?

Finally, while the Chicago/Illinois problems are well known, forward CHI prices reflect higher % gains that the CUS index. The three Northeast regions (BOS, NYM and WDC) are all priced at levels consistent with slower gains by Nov 2016 than the CUS index. What makes CHI unique among “winter” cities?

As market maker I’m happy to foster trades that would allow someone to sell CHI outright (or on spread vs. CUS) or to allow CHI bulls (pun intended) to express even more positive views.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog or hedging home prices in general. In addition, I encourage you to follow Gary’s blog.

Mid-March Update

The two trends of a) tightening bid/ask spreads and b) nearly no trading early in the month, continued to play out in the first half of March. As highlighted in the table to the right, bid/ask spreads have inched in across most regions and contract expirations. Bids (aggregated across a region) are up in 10 of 11 contracts (Boston being the outlier), while offers are lower (or unchanged) in all 11.

Spreads have tightened in both front contracts (with all K15 contracts <= 3.0 point bid/ask), mid-expiration (w/K16 benefiting from some narrowing of K15/K16 calendar spreads) and longer-dated contracts (w/ X16, X17 reacting to both narrower intercity quote spreads, and tighter calendar spreads).

(BTW- A table of prices and MTD changes across all contracts is available in the Reports section or you can access it here).

Despite the better trading environment, there have been no trades MTD. While the majority of trading tends to occur in the 48 hours around the Case Shiller release date, it is unusual (and yes, very frustrating) to see no trading in the first half of March.

While tighter bid/ask spreads are the focus, I suspect that any trades over the next two weeks (before the March 31 CS release) will be a result of even more dramatic changes in intercity and calendar spreads.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have questions about this blog or any other aspect of hedging home prices.

Using InterCity Spreads (IC) for relative HPA

In yesterday’s blog I touched on the notion that one might be able to use InterCity (IC) Spreads to express a view on the relative HPA performance of one region to another. While some regional pairs might make sense to debate (e.g. BOS v NYM, or LAX v SDG) a good place to start, and to illustrate the concepts in greater detail, is in contrasting one region versus the CUS 10-city index.

The example I’ve chosen is HCI vs. LAX. LAX is both the second largest Case Shiller region, but also (useful for this exercise) one where implied HPA is visibly lower than the 10-city index.

The table to the left shows all the necessary parts for converting CME futures prices into implied HPA. For example, the HCIG16 mid of 195.7 is 4.2% above the spot level, while the LAXG16 mid is only 2.7% above. As such, one might infer that the CME prices are consistent with the LAX index lagging the 10-city index over the next year. (I’ll let the economists and researchers offer reasons why this might/might not/ make sense.)

But what do you do if you disagree with the 1.5% premium of HCI vs. LAX (and you don’t want to take outright risk by just buying the LAXG16 contract)? If you believe that it’s too wide, then selling the HCIG16 outright (at 195.0 or 3.8% above spot levels) while buying LAXG16 outright (at 234.8.0 or 3.6% above spot levels) results in trades consistent with only a 0.2% implied difference. (A similar exercise results if you think the 1.5% is too wide and you try to go the other way. You’ll get 2.7%)

This is where IC spreads may be helpful. As with other spreads, IC orders are presented as the first contract (HCI) minus the second (LAX). Someone with a more bullish view on LAX (vs. HCI) might look to sell the HCI/LAX G16 spread. To do so at the outright levels described above would result in “paying up” 39.8 points. However in this example, the spread can be sold by hitting the -39.0 bid (Be careful with signs) or, as I’ve have already done, offer the spread at -36.0.

Net, the debate about the relative performance of the LAX index versus HCI has been narrowed to a 3.o point price range. The red and blue lines on the graph to the right show the narrower ranges. The blue line is consistent with the -39.0 bid, while the red line is consistent with the -36.0 offer. In both cases HCI prices would result in out-performance vs. LAX, but now with the -39.0/-36.0 market the debate has been narrowed to a range of 0.6% to 2.1% (vs. the 0.2% to 2.7% range from trading the contracts at the outright levels).

Net, the candle graphs (from yesterday) may be useful for illustrating implied HPA across regions, and intercity spreads give traders a way to observe and to express relative value over narrower ranges.

Please feel free to get in touch if you have any questions with this approach, or if you have any ideas for IC trading in G16 or other expirations. johnhdolan@homepricefutures.com

A market for 2015 HPA projections?

With yesterday’s release of the Case Shiller index numbers for Dec. 2014, several research firms have posted their projections for home price appreciation (HPA) for 2015. What can you do with these forecasts whether you believe them or think that they are too bullish/bearish?

I’d submit that the CME Case Shiller Feb ’16 (G16) contracts gives analysts a tool for both seeing what “the market” thinks as well as a platform for traders to express a view on 2015 HPA.

The diagram to the right shows bids, offers and mid-market values for the 11 CME housing contracts for Feb ’16, converted into percent changes versus the year-end Case Shiller #’s released yesterday. Recall that the Feb ’16 contract settles on the CS #’s released that month, which will be the index as of Dec.2015. As such, one might use the Feb ’16 contract numbers (bids, offers and mid-markets) for implied 2015 HPA.

The HCI contract (the one referencing the CUS 10-city index) is quoted at levels that translate into 3.8-4.6% increase in the CUS index between now and contract expiration. This seems in line with some research reports. (Recall that different indices- e.g. Zillow, Core Logic, FHFA reference different data, so projections may differ.) All ten regional markets are also quoted so users may infer forward HPA for specific regions (or trade).

As I noted in yesterday recap. bid/ask spreads in the Feb ’16 contract widened out as many quotes had been a function of Feb ’15/Feb ’16 calendar spreads. While bid/ask spreads are tighter today, they still have a way to go. I expect to see much tighter G16 markets over the next few weeks.

Nevertheless one can already see trends (e.g. quotes on SFR and MIA are consistent with those regions performing better than average (defined here as the CUS 10-city index) while LAX and WDC prices are consistent with lower projected HPA.

On can trade outright G16 markets, or trade one region on a spread versus the other (or the CUS 10-city index). I’m trying to develop inter-city spread trades and would be very open to trade proposals for any regional G16 contract vs. the HCI contract.

Feel free to contact me at johnhdolan@homepricefutures.com if you have any questions or if you’d like to discuss a trade.

CME activity post CS #’s – Jan

Case Shiller futures prices are mixed after this morning’s release of November numbers.

The California markets (LAX, SDG and SFR) are all higher, while the “winter” regions (CHI, NYM and WDC) are the softest markets.

As of noon, there have been 3 trades (DENG15, DENK15, and SFRX15).

Bid/ask spreads in the Feb ’15 series are all <=2.0 points (as there is now only one month to expiration). Spreads in longer-dated contracts have also been inching in. (For example, the bid/ask spreads across the 11 Nov ’16 contracts averages 4.4 points, vs. 5.5 points on Dec. 31).

While the CUS Nov ’16 has been my “benchmark” contract, and has been quoted with <1.0 bid/ask spread all month, the CUS Nov ’17 contract bid/ask spread continues to narrow (today 1.8 points). I’ve been using the CUSX16 to feed other prices (via InterCity spreads). Look for IC spreads to start appearing in Nov ’17 later this week.

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