Tag: outlook

A different perspective on Northeast vs. California markets

I have been accused of trashing the recent and forward-looking performance of the Northeast markets (relative to California) over the last few months.   While I’ve highlighted that implied one-year forwards, and longer-term HPAs for LAX, SDG and SFR are higher than for BOS, NYM and WDC, one counter-argument is that home prices in the Northeast didn’t fall as much as in California, and therefore have less to recover (or can recover more slowly) than the California markets.

The chart to the right is my attempt to put a picture to the relative recovery argument.

Those areas that fell the least (e.g. DEN, BOS) are the only regions with CME contract prices that exceed the past highs, despite recent slow growth.

The Northeast contracts (BOS, NYM and WDC) rank 2nd, 3rd and 4th in terms of recovery to peak (in terms of Nov 2017 contract prices).

While LAX, SDG and SFR have been rebounding sharply, the prices in the Nov. 2017 contracts are still down ~20% from past highs.

Finally, the two areas that fell the hardest (LAV and MIA) remain the furthest below past highs despite each being two of the strongest performing spot indices over the last year (trailing only SFR).

Whether regional prices are reverting to some longer-term norm, or whether forward prices might react differently once homeowners get back to “break-even” (i.e. does shadow inventory flood the market), there are a number of moving parts that traders can debate, disagree about, and hopefully trade.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have questions, or you have a strategy that you’d like to discuss.

Pulsenomics/ Zillow home price survey

Today, Pulsenomics released the Zillow Home Price Expectations quarterly survey of >100 economists and real estate fans (including me), of home price forecasts for the next few years.  Click here for link to survey results.  This survey represents a break from prior ones in that the reference index for forecasts has switched from the Case Shiller National index to the US Zillow Home Value Index (ZHVI).

The change might result in small adjustments to forecasts.  While the ZHVI and Case Shiller CUS10 index have “generally” moved in the same direction over the last few years, they diverged in the runup and fall in home prices during the 2005-2008 period.  The CUS10 index also has seemed to show more variability over the last few years.   ( I welcome someone to write a guest column highlighting the differences and possible implications for forward pricing.)

(Note that rather than contrast the Case Shiller National Index (which is released quarterly) with the ZHVI index (which is released monthly), the graph to the right shows the monthly ZHVI index versus the monthly CUS10 index.  While this introduces yet another index, the CUS index is the reference for the CME-CUS futures contract so it may be more familiar to readers of this column.)

Net – the Zillow survey remains the most comprehensive survey of home price expectations that I am aware of.  Anyone looking to trade housing derivatives should be aware of the results (headline +3% for 2013, but read the entire release for details and color), and as importantly, the dispersion in the forecasts.

I leave readers to click on the pulsenomics link to see the charts and tables.  I’m going to do my quarterly badgering of the survey outliers to see if I can guilt them into a trade.

As always, please feel free to contact me johnhdolan@homepricefutures.com if you’d like to discuss the survey or any aspect of housing derivatives.

 

 

HUD: Monthly Housing Scorecard now referencing CME Futures

Recently the folks at HUD improved their monthly “Housing Scorecard” report by making changes to a graph (see below) of past and forward home price indices.  They now use the CUS-10 index for historical purposes, and reference the CME futures (which settles on the same CUS-10 index) for values as of December 2011 and forward prices.  This makes the graph more of an apples-to-apples set of comparisons versus prior versions.  (Click link here for their full February report).

They also changed from using Dec. ’09 to Dec ’11 as the basis for comparing today’s forward markets to where housing market “expectations” stood at some point in the recent past.

All of the changes reinforce the same messages:

  •  home prices have bottomed,
  • “expectations” (as measured by CME futures prices) have risen, and
  • forward prices are consistent with improving HPAs (of about 3-4%).

Each of these messages has been reinforced over the last few months with every uptick in the CME contracts.

In addition to this graph, the HUD report is wealth of free, publicly-available information for anyone following trends in home prices and mortgage issues.

 

 

One-year forward markets

The recent Feb 26th release of the (December) Case Shiller indices sets the stage for year-end comparisons.  While the G14 (Feb ’14) contracts have been ignored until recently, they now facilitate one-year forward price comparisons.

The candle bar chart to the right shows the width of the bid/ ask spread (with the green bars representing mid-market prices) denominated in terms of percentages versus the recent Case Shiller releases.  So, for example, the BOS market is bid 156.4 (or +1.7% over the spot 153.81 BOS index), offered at 163.4 (+6.2%) with a mid-market value of 159.9 (+~4.0%).

As mentioned frequently in the recent past, the California markets (LAX, SDG, and SFR) all have forward prices that are consistent with stronger one-year HPA (Home Price Appreciation.)  New York and Chicago are two of the weaker one-year forward markets with BOS and WDC not far ahead.

The 10-city HCI index is the tightest market (in percentage terms) at (+4.1/7.4%) or (165.0/170.2) while the LAV market is the widest.

As mentioned there has been no trading in the G14 series to date, but now, as a reference tool/trading platform/ for 2012-2013 HPA forecasts, I expect that interest will develop, and bid/ask spreads will contract.  I expect that some of this tightening will occur as a result of inter-city quotes.  I am aware of four G14 inter-city quotes (in LAV, LAX, SDG and SFR) at better than “arb” levels.  The LAX IC market of -27.0/-22.2 is the tightest.  That market translates into LAX trading at between 0.6 to 3.0% better than HCI over the next year.

Please feel free to contact me on the outright G14 markets, the inter-city spreads that I cited, or any other aspect of this blog at johnhdolan@homepricefutures.com

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.

It’s that time of year…

When I say it’s that time of year, I’m not talking about the change of weather,  I’m not pining for eggnog,  and I’m certainly not looking forward to TSA pat-downs.

No -this is the time of year when Wall Street feels compelled to step up to the plate and make some projections beyond next Friday’s closing prices.  It’s the time of year when analysts go way out on a limb and give us their views on how the markets will perform for the entire year.   Hopefully a) they will do so before (not after) heading off to their Christmas parties, and b) they will share their thinking process.

I can’t comment on the first, but I’ve always noted that Wall Street saves some of it’s best graphs to describe their longer-term views.   I hope to share a couple of those over the next few weeks, but with the caveat that, as always, I only use their graphs to prompt discussion.  Please refer to the firms that authored the graphs for their original thoughts and work.  The analysts deserve your support.

From Citi:

Citi took the home price issue down to the most elemental of issues -that all markets, all prices, are just about supply and demand.  While many firms have focused on stated inventory and shadow inventory, Citi tries to highlight factors on the demand side.  

This graph, compared with another in their weekly report that shows shrinking household formation over the last few years, illustrates the point that while affordability might be low, there are fewer people looking to buy. 

While the decline in the share of home-ownership has primarily been described in turns of the ease of access to “affordability products”, that has since been reversed, the Citi graph makes the point that people may have changed their mind on what constitutes the American Dream.

The new 2011 American Dream may be a rental unit with the flexibility of moving on to wherever job growth first appears (and it seems from their graph, a car to get you there).  The new Dream may be young couples, who as one recent news-story  highlighted in a decline in the rate of marriage of 20-somethings, may view both marriage and home ownership as staid, dated forms of commitment.   The new Dream (or nightmare for parents) may be that college students rebound into their parents’ (now relatively attractive) empty nest while they re-think their choice of major.

So, those looking on only one side of the equation may miss what Citibank has touted,  either increased supply OR decreased demand will undermine prices.

Together -yuck!

2010: Projections vs Market Prices

With the expiration of the August contract (the June Case-Shiller data) we are now half way through 2010 and can begin to turn attention the to Feb  2011 contracts.  (Most of the time the front two contracts and the Nov cycle are where 90+% of the live quotes are.)

The thing that makes the Feb ’11 contract interesting is that it settles on the December Case-Shiller data.  As such expectations for year-on-year, or 2010 home price moves, can be tallied by a simple comparison of the Feb. 2010 Case-Shiller release and the CME contract values for the Feb. 2011 contract.

As the graph above shows, the Case-Shiller index for the 10-city index improved 1.8% through June, since the release, in February, of the December 2009 data.   Prices for the bids (squares) and offers (diamonds) for the Nov ’10 and Feb ’11 contracts are shown, with lines interpolating prices between those points and the most recent index values. 

As quotes in the Feb ’11 contract only begun to show after Aug ’10 rolled off, today’s  bid-asked spread is wide at 8.4 points.  Trading may remain challenging as we go through a period where the CS spot index has benefitted from the housing credit program, while sentiment has turned negative.  (See 8/31 blog).

Nevertheless the bid-asked spread translates into expectations of 2010 home price performance of -2.9% to +2.4%.   This lower bound is important as the recent MacroMarkets survey has economists calling for a decline of, on average, 2.08%.  (Contact MacroMarkets to register for their survey results  http://www.macromarkets.com/).   As there tends to be a reasonable distribution in those esitmates I would imagine that many are expecting declines of more than -2.9% (as implied by the 15300 bid for the Feb ’11 contract).

Stay tuned.  It’s a long way to February.

(While I am illustrating the CUS index and CME contracts, the same analysis can be applied to each of the 10 indices where CME contracts are traded.  Look for city-specific discussions in future blogs.)

Washington follows us!

One of my personal highlights of the recent Treasury meeting to address housing problems was to discover that HUD has been following the CME futures markets – and uses changes in the prices of forward contracts as indications of changes in sentiment on forward home prices. 

This graph, that shows the changes in CME contract prices between Jan. 2009 and July 2010, is from the second page of a monthly publication titled “The Obama Administration’s Efforts To Stabilize The Housing Market and Help American Homeowners”, otherwise known as the monthly housing scorecard.  (see link below for entire 8-page report.

http://portal.hud.gov/portal/page/portal/HUD/initiatives/Housing%20Scorecard%20Documents/JULY_Scorecard_1.10.pdf

Regardless of your politics, the package is a useful tool with 16 graphs and a tally of many housing metrics.

Beyond this report the HUD website is great springboard to press releases on programs designed to help borrowers.  As many efforts by the Government to address distressed homeowners may have an impact of foreclosures, housing inventory, and therefore pressure on home prices, the programs are worth understanding.

Book Review – The Housing Boom and Bust (Thomas Sowell)

One of my roles away from here is that of  moderator for a book club at my local library.  (Non-fiction, primarily foreign affairs and current events)  That role has reintroduced me to a love of reading that proved elusive with a life (in the early 2000’s) of early business meetings, client presentations, and getting the kids off to bed.  As it takes reading three books to find the one I can recommend to the group, and since “the crises” has been so much on every one’s radar, I’ve had the chance to read them all.  (Collapse of Lehman, Collapse of Bear,  Collapse of AIG, Collapse of …..).

The book that stands out from that crowd, that I would like to tout here, both for being well-written and due to its relevance to this site’s themes is  –The Housing Boom and Bust(revised edition) by Thomas Sowell.

Mr. Sowell’s approach is to explain (in the newly updated, slim paperback version)  how forces (incentives, mostly) built up over a period of years, were the reasons behind the inevitable real-estate crash.  He tars politicians (both local and national, Democratic and Republican) with their use of policies that were designed to appease either in the short-run, or to limited constituencies.

A conservative by nature, he suggests that “Affordable Housing” programs represent an intrusion by the government into market practices.  He argues that many of the affordability products that were created during the boom years, that were designed to increase home ownership, by having banks lend (and then securitize) to those borrowers, were only made to appease mis-guided government policies.

While the common wisdom is that we all learn from our mistakes, he offers a dire, but critical forecast that  “…those who say that politicians never seem to learn overlook the fact that there is no reason for them to learn, when they pay no price for being wrong when they can simply blame others and continue on with policies that have been politically beneficial to themselves, however detrimental those policies may be for the country.”  (No surprise to WSJ readers, Mr. Sowell cites Congressman Frank and Senator Dodd several times as their roles and views on housing policies have “evolved”). 

This is the best book that I’ve read on the roots of the real-estate financial crises (although there are some other great ones on how money was made or lost).   They say  ” If you want to know where you are, figure out how you got here”.  This book does a great job showing how small, well-meaning actions, took us down the path to where we are today.

Similarly, if you want to figure out the political angles on key issues related to home prices down the road (e.g. fiancial regulation, the role of the GSEs), and to home price futures contracts, then I strongly encourage you to read this book.