outlook – HomePriceFutures.com

Recap of August activity in CME Case Shiller futures and options

I’ve posted a recap of activity in the CME S&P Case Shiller home price index contracts for August. You can find it in the Reports section or link here. The report include graphs, tables, and charts on the 121 home price index contracts (11 regions * 11 expirations). Readers may view forward curves to observe prices that: 1) are consistent with positive, but declining HPA, and 2) which regions are priced for bigger gains than others.

The summary findings in the report are:

–There were 8 futures contracts traded in August in 3 regions (DEN, NYM and SFR) across 3 expirations, in 3 trades. One trade (5 SFRX22) was negotiated off-line. Unusually there was only one lot traded the days just before, or after, the release of Case Shiller #’s.

–There were no options trades (and haven’t been any in almost a year). I’d like to be responsive to any inquires –puts, calls/ in, out of the money/paired trades -to jump-start trading in options.

–Despite low volume, there is interest from third-parties, primarily in front contracts and across the SFR expirations. The SFRX22 contract was quoted much of the month with <3 point bid/ask spread.

–While bids and offers were generally lower across many regions for August, BOS, LAV, MIA and WDC all had higher bids. (Note that 3 of the 4 have no OI so I am trying to “stir the pot”).

–OI on futures rose from 44 to 48. (OI dropped below 100 in April 2014 and I’ve been trying to claw back to that level).

–OI has become even more concentrated in Nov expiration cycle with all but 2 of 48 OI in Nov contracts.

–Growing interest in “Fractional Interests” and “shared appreciation strategies” leading to more detailed conversation of home price expectations. I’m planning a mid-Sept blog to detail developments in this area. Open to contributions.

As a general theme, there seems to be growing sentiment that HPA gains are slowing (possibly increasing the need for hedging), bid/ask spreads have been contracting, and I’m eager to facilitate retail-sized trades. Net, a good landscape for growing volume.

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

Thanks, John

Basics: Approaching Aug expiration -review of theory

With the August 2016 contract expiring next week (trading stops 3 PM New York on Monday, valuation as of Tues Case Shiller #’s 9:15) it may be useful to recap the (quarterly) expiration process.

The table below has the Case Shiller index history for 3 months (June, July, and August release) for 2015 as well as the last two months (June and July) for 2016. Quotes (bids, offers and mids) for the Aug 2016 contract prices are shown in the blue area. (Note that bid/ask spreads average just under 1.0 point across the 11 contracts, which is typical of this phase of the expiration cycle.) Finally, mid-market quotes are compared to last month’s release and the Aug 2015 release for MOM (month-on-month) and YOY (year-on-year) percentage changes.

I use mid-market levels to illustrate percentage gains as, in theory, if traders “know” (or believe in their research) what the CS #’s will be on Tuesday morning, they can bid below that level, or offer above that level. As such, since each point that one can buy below the index or sell above is worth $250/point, it has been argued that the bid/ask range should be consistent with some range around the expected Case Shiller release (as traders attempt to capture differences between what they “expect” each index will be, and their bid or offer). If so, the market quotes might be useful for those drafting next week’s press releases as it appears that market quotes are consistent with DEN, MIA, SDG and SFR all posting >7.0% gains for the last 12 months, while NYM and WDC will continue to be the laggards. ( I’ll leave it to other to explain why that might make sense).

Of course this theory would work better if the markets were deeper. Most quotes are only 1×1 (one lot bid for and one lot offered) and many of the quotes are mine.

The “accuracy” of the expiring contract has wavered from months where all 11 index values were inside the bid/ask spread on the last day of trading to last quarter where there were multiple outliers (some of which were > 1 point).

I’m happy to facilitate anyone’s efforts to express a view on the next week’s index levels. Please feel free to contact me (johnhdolan@homepricefutures.com) if you like to propose a trade.

Finally, I’d note that with the expiration of the Aug ’16 contract the CME will open a Feb ’18 expiration. Since that contract expires on the value of the CS index released in February 2018 (the Dec 2017 index), I hope to propose a list of Feb ’17/Feb ’18 calendar spreads for those that want to debate HPA gains (?) for 2017.

Quarterly Pulsenomics home price survey

The results of 3rd quarterly home price survey by Pulsenomics have recently been released https://pulsenomics.com/Q3_2016_HPE_Survey.php. (Disclosure – I am a survey contributor).

I have a few observations on the numbers (as shown in table below):

Mean/Median expectations for 2016 are much higher. This may be a function of higher stock market, lower mortgage rates and low inventory levels. It is consistent with the stories from Denver, Portland, Seattle and other hot markets. While CME implied gains for 2016 have also been rising, 1) they reflect changes in Case Shiller index, not the Zillow index measured here, and 2) CME implied HPA (not shown here) is still lower than these survey results. (In comparing surveys vs. markets – particularly a market where interest seems dominated by hedgers – I wonder whether surveys, by their nature, are more optimistic, while markets where one can hedge might be quoted below “expected” future levels (if there’s an imbalance of interest).
Pulsenomic HPA gains are front-loaded, and with the passage of 3 months, have lower standard deviations, while longer term HPA projections are essentially unchanged, but with slightly wider projections. This seems consistent with recent comments in the press from economists (and the tone of political advertising?) expressing concern for the sustainability of home price growth.
Net, CME prices should translate into steeper calendar spreads on shorter expirations (which they have) and higher prices on longer-dated options (to reflect increase in standard deviation of expectations.)

Feel free to contact me (johnhdolan@homepricefutures.com) on this blog or any other aspect of hedging home prices.

Aug Recap posted

I’ve posted a recap of activity for August in the CME Case Shiller home price futures contracts. The report (and monthly price changes are in the Reports section or can be accessed here: Recap, Prices )

It was another quiet month of trading (only 5 trades) but prices moved sharply lower (possibly in sympathy with the stock market sell-off). Bid/Ask spread contracted in the 10 regional contracts (when summed across all expirations, and spreads were notably tighter in 4 expirations (see table).

Open interest declined to 49 (as the August ’15 contract rolled off). Almost half the OI is in what is now the front contract (Nov ’15). I’m open to ideas on how to move these positions forward (and open new ones) to grow OI levels.

Longer-dated calendar spreads and outright quotes were consistent with declines in longer-dated HPA. A graph of one-year chords (page 19 of the Recap) illustrates the changes in implied HPA from July to August.

While stock market volatility grew, bid/ask spreads on longer-dated contracts narrowed. This both allowed for better Intercity spread quotes, as well as was the result of better IC spreads. Since my interest is in getting traders to think about these contracts as a hedging tool, I’m to try and change my focus from X16 to X17 contracts both in outright markets and in IC spreads.

That said, most traders either want to trade the front contract, or stay in front contract as it typically has lower volatility and tighter bid/ask spreads.

As such, expect my efforts to be bar-belled this month with a focus on X15 and X17 contracts.

As always if you have any questions, or trading axes, please feel free to contact me (johnhdolan@homepricefutures.com).

Source of 2015 gains?

As I was compiling the (very thin) June recap I was struck by how the prices of CME Case Shiller home price futures have continued to rise year after year.
Note how the year-end CME prices (as measured by mid-market) are higher in Dec ’12 than in Dec ’11, higher in Dec ’13 than Dec ’12, and so on. Today’s prices are also higher than year-end 2014.

I expect that some of this may be that futures markets might “need” continued reaffirmation of a strong market for home prices. That is, prices for the Nov ’18 contract may be somewhat based on the notion that past upward momentum will be maintained. Each monthly Case Shiller release -even if not a surprise- then gives bidders for longer-dated contracts more comfort to inch higher their bids.

While that may be – and needs feedback from academics who’ve observed such in other products – in addition there have been more surprises to the upside over recent contract expirations. That is, the actual Case Shiller release has been more likely to be above the bid/ask range of the contract that expired the day-before, than below.

Furthermore, Wall Street housing analysts seem to have also been surprised with the robustness in home prices and my sense is that more have revised their price forecasts higher over the last few years, than lower (with Chris Flanagan’s (BOA) call for lower prices after 2017 being the one exception that’s hit my radar).

So then, what has been the source of these surprises?

A debate over home price winners and losers prompted me to look at the tiered Case Shiller indices available on the S&P website. (Use the pull-down menu “Factsheet” ) While I’m sure that others have commented on this extensively elsewhere, I was struck by how much home price gains were concentrated in the bottom one-third of home prices.

The set of graphs to the left shows the month-on-month, and year-on-year percentage price differences in the non-seasonally adjusted tiered indices for the CUS 10-city index components. Two things jump out (and again treat this as my journal if already obvious to all):

There is much more seasonality in the lowest 1/3rd group regardless of weather (e.g. cold in BOS, CHI vs. warmth in MIA, SFR) or relative level of home prices (e.g. CHI vs. SFR),and
The lowest 1/3rd sector has been where the biggest gains have been over the last year (e.g. BOS, CHI, DEN, MIA, SFR and WDC).

The last few years have seen efforts to restart housing, declines in distressed sales (which I’d imagine are concentrated in bottom 1/3rd), the impact of rent-to-buy RTB programs (also concentrated in areas where home prices are more affordable), and “some” relaxation of underwriting standards (which might have a bigger impact on the marginal buyers that own – or want to own – homes in the lowest 1/3rd price group.

Net it shouldn’t be surprising that gains in the lowest 1/3rd priced homes have gotten here (i.e. can explain recent home price gains and surprises).

But what about going forward? I might not expect RTB programs to be as big buyers going forward and the level of distressed sales has reached levels from before the crash in home prices. Much has been written about how income gains have been concentrated in the top 1% (and are not reaching the likely buyers of the bottom 1/3rd-priced houses).

In addition, the age-old question of the impact of (possibly) higher mortgage rates was raised in a today’s HousingWire post . At today’s interest rates, small absolute increases in mortgage rates result in big percentage changes in monthly payments, and therefore affordability. While traders and investors might be able to stomach a 1% rise in mortgage rates, where will the borrowers for the bottom 1/3rd-priced homes come up with the extra cash?

Finally, if interest rates rise, what impact will that have, and how concentrated will that impact be, on those borrowers for the bottom 1/3rd-priced homes who have ARMs? (Has anyone got evidence -more than anecdotes -as to whether ARMS are concentrated in lowest 1/3rd home prices.) While the bond market may be focused on “one and done” rate increases from the Fed, what happens if the Fed gets behind, starts to focus on inflation and has to ramp up short rates dramatically? Even modest changes in short-term term (benchmark) interest rates could have a huge impact on homeowners ARM payments.

While I usually remain neutral on my views of forward home prices, the historical dependence of price gains in the lowest 1/3rd in home prices has me wondering about CME CUS 10-city futures prices for 2017-19. We’ve gotten here on the gains in lowest-priced homes. Can anyone argue that that is sustainable?

Anyway, I figured that I’d share the graphs, stir the pot, and hopefully get some discussion (and trading) started about price levels on longer-dated CME contracts.

Anyone with ideas is welcome to post here (or the LinkedIn group- CME Case Shiller Home Price Futures).

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

Feb recap (finally) posted

I just got around to posting my recap of activity in the CME Case Shiller futures contracts for February. Anyone living in the Northeast knows that shoveling snow and chipping ice is taking WAY TOO MUCH of my time. The recap is in the Reports section or you can access it here.

February was another slow month with limited trading (4 contracts), but tighter bid/ask spreads and higher prices (in 9 of 11 regions). The Feb release of the Case Shiller #’s was probably the one with the most surprises (i.e. index values outside bid/ask range of expiring contract) over the last four years. You can find my blog on the surprises and market reaction here.

With the expiration of the G15 contract, the CME opened trading in the Aug ’16 (Q16) contract on Tuesday Feb 24 . Other than some quotes the first trading day (designed primarily to bring closes in line), there has been little activity in Q16. I’ve tended to focus on fewer expirations, and so the Q16, K17, X18, and X19 contracts have few quotes across the regions (except for the HCI (10-city index) contract.) While I’m happy to get help from anyone looking to support such “orphaned” contracts, I think that interest needs to be concentrated in a smaller number of expirations until volume picks up.

The primary change in the monthly recap is the introduction of a page with intercity spread (IC) orders. IC spreads have already been useful in tightening quotes in the X16 and X17 contracts. I’d encourage readers to review that page and to read my Feb 26 blog (click here) that describes how IC spreads can be useful for discussions of implied HPA differences across regions.

Finally, I continue to marvel at the success of the S&P 500 index versus forward home price expectations. I’ve posted an update of the graph that shows the strong increase in stock prices versus continued unchanged expectations in forward home prices. There are issues here that I hope to explore in a future blog, or class.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this recap.

Thanks,

John

Higher Forward Prices, but Forward Prices Remain Flat (and could go lower)

As I listen to the debate about the direction of home prices over the next year, I think people get confused between those who call for a higher level of forward prices (a possibly bullish signal), versus those highlighting reductions in, or dampening of, expectations (so a negative signal). The confusion stems from the notion that both can be right.

The graph below shows the closes to HCI contract (the CUS 10-city index) for Nov ’16. Friday’s close of 209.6 is >16% above today’s spot Case Shiller index (of 180.13). The market is, and has been for quite some time, pricing in >5% HPA (so make those bullish bets and hedge here).

On the other hand, the prices for the CUSX16 contract have been flat to slightly lower since the run-up ended in July (this despite the increase in the reference index from 169.47 to 180.13 during this period). In effect, the market adjusted to higher forward price expectations 8 months ago, and has seen no reason to move higher still. In theory, an increase in negative sentiment (let’s see what tomorrow’s #’s bring) could lower Nov ’16 prices but still leave them well above spot levels. Contract prices would still be consistent with higher index levels over the next 2+ years – just the implied rate of HPA growth would be lower.

When you get past the bearish headlines, most bears only seem to be talking about declines in HPA but there are some (see Pulsenomics survey) calling for outright lower home prices. If you hear of any outright bears (i.e. willing to bet that index levels will be lower 1-2 years from now) please make them aware that they can (financially) express those views here, at premiums to spot index levels, across all ten regional contracts.

Feel free to have any bears (or bulls) contact me at johnhdolan@homepricefutures.com and I’ll be happy to walk them through trading mechanics.

What do Nov markets say about upward momentum in home prices?

While the focus for those looking at home price numbers might be next Tuesday expected strong results in the Case Shiller indices, here’s a table that gives a sense of how much more in home prices might already be priced into the CME futures.

The table to the right shows the current spot index for each of the 11 traded contracts, the CME Nov ’13 (X13) markets, and the percent that each of the bid, mid and ask is above current spot levels. Referring to the mid, markets have already priced in further gains of ~8-14% over the next five months. As with most Case Shiller observations, SFR prices reflect the greatest further appreciation while NYM is the laggard.

While one’s reliance on mid-market observations is subject to the size of bid/ask spread in the Nov ’13 markets (shown in yellow), even the bid sides of the CHI, LAX and SFR Nov ’13 markets are consistent with gains of >10% by November.

Traders can express views on their expectations for gains on either side of the outright Nov ’13 markets, or the Aug/Nov calendar spreads (not shown). The limited trading in July has mostly focused on these calendar spreads with trades occurring in DEN, SDG and WDC contracts.

As always if anyone has any questions on the topics raised in this blog or any other issue related to housing derivatives, please feel free to contact me (johnhdolan@homepricefutures.com)

Pre June CS #’s

The Case Shiller index #’s will be released on Tuesday morning. At no time in the last five years have I seen as much positive news priced into the front contract (relative to the spot index).

The graph to the right shows the bid/mid/ask quotes on the 11 Case Shiller futures contracts (for August) that are traded on the CME. Between bullish home buying anecdotes and strong seasonal factors, the markets are “looking for” index price increases of between 4.2-8.5% over the next three months (using mid-market quotes). (NYM is the weakest while SFR is the strongest). How much of that increase is reported in Tuesday’s release will probably drive quotes in the August contracts later that day.

Uncertainty about the magnitude of the expected “pop” in index levels has probably resulted in the wider bid-ask spreads and limited trading seen over the last several weeks. (I mentioned in a LinkedIn write-up that any bid/offer order flow gets imbalanced when expectations all line up the same way. While many traders can recall the absence of bids in the down markets of 2008-2010, the reverse has been true over the last few months, i.e. there have been fewer offers.)

(I would also note that several bid/ask spreads were tighter last week but (as often happens) traders tend to pull orders or widen quotes in the days before the Case Shiller release. This bar chart reflects those wider bid/ask spreads).

I expect this market to remain dormant until Tuesday morning at which time there might be a strong reaction to any unexpected index releases. Reporters can prepare their headlines now, in that the index results will be strongly higher. How much will drive August quotes.

As always, if you have any questions about these contracts or any aspect of housing derivatives, please feel free to contact me (johnhdolan@homepricefutures.com)

May ’13 contracts – 3 weeks to go

With the May ’13 expiration in just three weeks, and a handful of recent K13 trades (LAV, MIA, NYM), I thought that it might make sense to focus on front-contract markets.

The following table shows the recent history of each of the 11 traded CME reference indices as well as recent bids, offers and mid-market levels. These mid-market levels are then compared to Feb ’13 and Mar ’12 index levels to show what index increases might be.

(Recall that the May 2013 futures settle on the March 2013 Case Shiller index which measures the period Jan-Mar 2013. This makes trading in the expiring contract different from other expirations as trading becomes an act/art(?)/ of anticipating how the already-known repeat-sales price data points will be assembled into the March 2013 index. Since the futures settlement price converges to the next CS index release, it can be strongly argued that the expiring contract prices should reflect expectations.)

Posted bid/ask spreads for the May ’13 contracts were all between 1.0 and 2.0 points, but as these have to be kept live throughout the day, it’s likely that larger amounts might be traded at inside posted levels.

Mid-market prices for the May contracts are slightly higher than the Feb indices indicating that negative seasonal factors are likely to be offset by growing buying interest.

The headlines for Wed. May 29th will highlight the year-on-year gains in SFR and LAV (each ~>19%) and contrast those against the lagging NYM and CHI markets.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this table or any aspect of trading home price derivatives.