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Jan 28-Post CS #’s

Bid/ask spreads widened across many regions and expirations after the release of the Case Shiller #’s this morning. The attached table shows the history of the CS indices over recent history, the CME markets for the front G14 (Feb 2014) contract during late Monday, the actual CS #’s that were released this morning, CME markets later this morning (after the numbers), and changes to bids, offers, and bid/ask spreads.

I’ll spend more time on the longer expirations on a later blog, but changes to the front contract seem to best catch surprises to the CS #’s versus expectations.

In general, the DEN, LAV, SFR, and WDC markets are slightly higher, while BOS, CHI and LAX are slightly lower.

Bid/ask spreads have tightened in the LAX, MIA, NYM, SDG and WDC markets. (In general the passage of one month means that you are one month closer to the convergence at expiration, so I would expect bid/ask spreads to narrow as each month passes.)

There have been no trades as of 11 AM (NY), but different traders seem to working to bring bid/ask spreads in.

Market Color – Day before Jan Case Shiller release

I’ve posted delayed prices for the CME Case Shiller futures from earlier in the day in the Reports section (here) to give traders a reference point of where markets where before tomorrow morning’s release of the November Case Shiller indices.

Bid/ask spreads compressed during the month for every one of the 11 regions -except for the CUS contract. (CUS trades in X14 and X16 resulted in higher offers in those contracts, which then translated into higher offers on nearby contracts via calendar spreads). Thus the “lack of depth” on the X14 and X16 contracts translated into “lack of depth” on other expirations. Prices on many expirations seem to reference (via calendar spreads) the G14, X14, X15 and X16 outright prices. Any contributions to those series will then have a multiple impact on other expirations.

CHI and MIA contracts tightened the most (albeit still at wide levels for MIA), while DEN and SDG moved the least.

Bid/ask spread in January tightened across all maturities (averaging across the 11 contracts) with the Nov ’17 contract showing the best improvement. My sense is that those bidding and offering calendar spreads for the X17 and X18 series have entered spreads that are consistent with 2.5-5% HPA from 2015-2016.

The CHI, NYM, and LAX regions remain the tightest markets (along with CUS). My recollection is that most of the trades this month have been in the CUS and LAX contracts. Only LAX, NYM and the SFR regional contracts have double digit open interest. (CUS remains the highest). The MIA, SDG and WDC markets seem to have the widest bid/ask spreads.

johnhdolan@homepricefutures.com

An onoing tale of two markets: Northeast & California

A recent NY Times posting (here) shows a 2-column table with a) the % change in the 20 regional Case Shiller indices over the last year versus b) the fall from the peak value for each region (which generally occurred in 2006-07). While the table (and very user-friendly, interactive graph) showed the change in values in numeric form, I thought that the following graph might better illustrate the point that I, and many others, have made over the last few years.

I created a scatter diagram of the two columns to show that the index values that fell the furthest are, generally, the ones that have bounced back the most. (I’ve only labeled the 10 CUS index components. The un-labeled values are the remaining components of the CUS 20-city index which also, generally follow this “rule”.)

The Case Shiller index values in the Northeast (blue circle) fell less than those in California (green circle), but have bounced back less this year (an observation to keep in mind should options trading ever restart).

Now one can debate whether the selloffs from 2006 were due to lending practices (e.g. California and LAV borrowers were anecdotally prone to higher CLTVs, while Dallas (not shown but the same values as DEN) used second liens less frequently, if at all), or whether the bounce backs were due to differences in recourse practices across regions, or whether both the selloff and faster bounce backs in the indices (not individual home prices) were more impacted by a higher concentration of distressed sales in certain regions. These may all be important considerations in understanding these indices and in trading housing futures.

I would use this table to note that real estate prices tend to trend and that the quotes on forward levels of these contracts on the CME futures contracts (not shown here) are also consistent with the notion that the California markets will continue to improve at a faster rate than the Northeast regions, for the next 2-3 years.

Finally, while there appears to be strong correlations within regions (the 3 Northeast cities and the 3 California markets), which tends to support hedging and inter-city trading strategies, the other four areas (CHI, DEN and especially LAV and MIA) seem to be much less correlated (with challenges for trading, but benefits for diversification).

If have any questions about this blog, or care to discuss any trading strategies, please feel free to contact me at johnhdolan@homepricefutures.com.

Jan 9 update

As I mentioned in the month-end summary, bid/ask spreads have compressed slightly since Dec. 31. I posted a set of tables in the Reports section (click here) that shows the changes between Dec 31 and Jan 9. The BOS, CHI, DEN, and WDC contracts all have (on balance) higher bids while there are slightly lower offers in SDG and SFR. While some of the progress has been made in non-Nov cycle quotes (e.g. Q14 (Aug 2014) and K16 (May 2016) the front G14 contract shows tighter bid/ask spreads in 7 of the 11 contracts (vs. Dec 31). The CUS contract remains the tightest, with CHI, LAX and NYM having the tightest bid/ask spreads of the ten regional contracts.

Dec recap (belatedly) posted

I just got around to posting a recap of activity in the S&P Case Shiller (home price index) futures that are traded on the CME. (See Reports section or click here). Unfortunately it wasn’t large December volume, but other moving parts in life that kept me from getting to posting these numbers. My apologies to any waiting for results.

Dec. 31 turned out to be both the day that the October Case Shiller numbers were released, year-end, and the beginning of a long weekend for some, so quotes were not as tight as I would have liked. Recall that I used Dec 2 prices to overcome a similar problem with liquidity post-Thanksgiving. Even though (some) spreads have tightened dramatically since Dec 31, I decided to stick with Dec 31 quotes (so that others looking back could replicate this work, and true year-on-year comparisons could be made).

In addition to the Dec recap, I’ve updated (and posted to the Reports section) historical volume, open interest, and updated price change tables and a graph of all contracts.

The overall message from December is that activity plummeted. There were only 7 contracts traded (down from 68 in Oct and 23 in Nov) and bid/ask spreads widened. (As noted above, some of have come back sharply but my comments are as of Dec 31). In addition, I “sensed” a lower participation by other traders (w/ one exception that I’m aware of) as there were fewer instances of bids being “plused” or offers reduced. There were also more gaps in the 121 contracts that needed to be plugged (if a curve for all 11 contracts was to be maintained). I too, was guilty of lower involvement as my focus was elsewhere.

I attribute some portion (but not a majority) of the reduced participation to the CME decision (back in the early fall) to eliminate posting of CS futures prices on their website. Several readers complained about this decision as they said that they didn’t have the other resources (e.g. Bloomberg) to follow the market. While free trial Equote systems were offered, I imagine that those have expired. I can report that the new head of housing products at the CME is aware of the situation and has made good noises about addressing the issue. (I will blog the moment I hear any update).

Despite all of this news, the platform for trading housing contracts remains intact, spreads have tightened in 2014, and I can report continued interest (at least from the academic community, from my recent participation in the annual AEA (American Economic Association) conference. In addition, the contracts received a HUGE endorsement when Robert Shiller cited them in his Nobel Prize address in early December. I still believe that the CME is the best platform (today) for expressing a financial view on forward home prices.

With seasonal factors kicking in, and the pace of forward HPA (as implied by calendar spreads and surveys) dropping to 3.5-4.5%, the need for hedging would seem to be more important. Businesses (to include the Rent-to-Buy programs that have been such a large factor in driving selected regional home prices) should be having discussions about morphing their outlook from those of a “trade” to those of an ongoing business. That is, how can they demonstrate to their shareholders, banks and rating agencies that they’ve taken steps to protect against a sell-off in home prices. There are other businesses (e.g. to include builders) that I’d also be happy to talk to about hedging.

Over the near term I sense that I, and this market, could use help in three key areas: 1) repopulating calendar spreads to encourage debate about the pace of forward home price growth (or seasonal factors), 2) embracing inter-city spreads as a way to express a (potentially) lower risk opinion on relative moves in regional forward prices, and 3) using both to reign in 2018 bid/ask spreads. I am likely to be more focused on front, Nov ’14 and Nov ’16 contracts (which can be used as anchors for calendar spreads), certain key regions, and marketing.

I’m happy to tout (via blog, LinkedIn, or Twitter) any axes that traders want to share. Please contact me (johnhdolan@homepricefutures.com) if you have any questions or comments.

Happy New Year!

John

Recap of Nov activity posted

I’ve posted a recap of activity in the CME S&P Case Shiller home price index futures for the month of Nov to the Reports section of this website (or one can click here to access.) The report uses an end date of Monday Dec. 2 as the last business day of November (Friday Nov 29) was in the midst of a holiday weekend.

In addition I’ve updated month-end graphs, prices, price-changes on the month, and long-term volume and open interest tables (that can all be found in the Reports section).

The “headlines” for the monthly recap include:

Narrowing of bid/ask spreads during the month, followed by dramatic widening post CS #’s
Volume of 23 contracts
Open interest dropping from 149 to 81 with the expiration of the Nov ’13 contract (I’ve included a table showing how this is an annual phenomenon
Introduction of Nov 2018 contract
Tables on volume, open interest, price changes, bid/ask spreads, calendar spreads
Graphs for each of 11 contract (both linear graphs and bar graphs)

I may take some pages of the report and focus on them in separate blogs but for now I just wanted to post the report.

If you have any questions, please feel free to contact me: johnhdolan@homepricefutures.com

Futures markets: post Nov CS release (Edited 10 AM to include table)

The CME futures reacted to yesterday’s release of the September Case Shiller indices by performing what we used to call an accordion market. One side (in this case primarily the offers) was unchanged, while the other pulled away (in this case with bids dropping). We’ll see over the next few holiday sessions whether the accordionists who follow this market, can bring the spreads back closer together.

The drop in bids was prompted by more “surprises” to the downside on Case Shiller numbers than to the upside. Using this table as an illustration, the Case Shiller numbers for LAV and WDC were below recent bid/ask quotes, while only LAX ended up coming in higher than the last offer. I view such outliers as “surprises” as any trader with advance knowledge (or great research) who knew the numbers in advance could have profited by hitting the last LAV bid, or lifting the last LAX offer. Since no trader did so, none had knowledge- hence my categorization of these outliers as surprises.

In addition to the outliers, all seven of the other regional indices (so not counting CUS) came in below the mid-market level, thus adding to the pressure on bids yesterday.

While I note that generally bids were lower and offers flat, this didn’t hold completely true across regions and the expiration cycle. The table below shows the changes in the CUS contract. I’ve also posted a table in the reports section (or link here) showing prices sometime the days before and after the release of the Case Shiller indices across all 11 regions. LAX prices held in, or improved slightly. Across expirations, there was support for various Q14 (Aug 2014 contracts) pushing both CUS and LAVQ14 higher on the day. On the other hand, longer dated contracts were bid 5-10 points lower in typical “get me out” fashion. It will interesting to see if longer-dated offers, who have been posting ever lower prices, will chase these lower bids, or if the bids will rebound to narrow the bid/ask spreads.

There were only a few trades in the CUS and LAV markets. The LAVX16 trade was notable in that a) the LAV contract has had little volume, b) the price 149.80 represents a 66% premium over the low March 2012 LAV index value (so May release) of 89.87, and c) was the result of an inter-city spread trade versus CUSX16. (The climb in the LAV futures price also further reflects the importance of having a view and/or understanding of the impact to an index of changes in the percent of distressed sales and the discount on those sales).

The expiration of the Nov 2013 contract brought a huge drop in open interest (to 81) as all of the CHIX13 trades from the last few months rolled off. But as one door closes, another opens, and, per their schedule, the CME rolled out the new Nov 2018 contract. Three regions had two-sided markets in X18 by the end of the day, all consistent with modest increases in home prices versus 2017 quotes.

I hope to populate other X18 markets today, tweak some calendar spreads, and find other ways to bring bid/ask spreads in closer. That said, I expect most thoughts will be on turkey, family and the weather (at least here in the Northeast). Therefore, I will probably look to compile numbers on Mon Dec. 2 for month-month comparisons.

A Happy Thanksgiving to all!

John

Stiring the pot: LAX

While recent volume in CHIX13 helped to bring some attention to trading in the CME Case Shiller futures contracts, the real value-added will come when longer-dated contracts begin to be quoted with tighter bid-ask spreads. That will shift the discussion from measurement of recent home price trends, to the viability (if there’s depth) to hedging of current exposures and forward production (e.g. for home builders).

Since the California markets have the most room to tighten, and since California has tended to lead the country in mortgage practices let me review four ways to think about LAX forward values.

Outright
Calendar
Inter-city
Options

1) A look at the (all too familiar roller-coaster) graph to the right puts LAX index history, and recent CME mid-market levels, into perspective. The spot LAX index (where the black line ends and the green line begins) is up~35% from the low index values of 159.18 in July 2009 (and 159.53 in Feb 2012), and ~21.7% over the last 12 months.

The Nov ’17 LAX contract mid-market value of 253.8 is another ~20.5% above spot levels, and is within 20 points of the all-time high (As an aside, recall that the Nov ’18 contract will be launched in ~3 weeks, and should be quoted ~260). As such, the CME mid-market futures are pricing in gains over the next four years, equivalent to what’s happened in just the last year. Is this a well-deserved slowdown (as underwater borrowers begin to see the light of day) or a too-conservative projection that underestimates the strength of the LAX market?

On Friday, the tightest longer-dated LAX contracts were LAXX15 232.0/239.0, and LAXX16 241.0/249.0. These probably are the two best opportunities for traders to square off in the “where is LAX headed” debate.

2) While outright markets might represent the purest bet on the level of forward index values, calendar spreads are a potentially interesting tool for discussions about how much a longer-dated contract should trade over a shorter one.

The table below has a recent set of calendar spreads for all of the November expirations in the LAX contract. The table shows both the bids and offers, and the difference between mid-market to mid-market numbers. All numbers in the top portion are translated into annualized % changes in the lower section.

As with the graph above, the table shows the rate of year-on-year gains in the index to slow down from the last year’s 20+% increase, and dampening to a 3.5 to 5.0% range in the later years. Again, some bulls may view this as too much of a slowdown, while bears looking for home prices to stall, may see these implied HPAs as too strong.

Finally, a benefit to calendar spread trades relative to outright trades is that a trader can better fine-tune during what individual time period their views might differ from these quotes. That is, someone can remain bullish for the next year, but have a more negative view on prices between Nov 2014 and 2015. They can place a focused bid or offer on the X14_x15 calendar spread that might better represent their views than an outright, longer-term buy or sale.

3) Intercity spread quotes offer a 3rd way for traders to put a contract in a different perspective. The CUS-LAX X16 IC spread may be good way to frame the debate as whether LAX will outperform the CUS 10-city index (and by extension, how LAX will perform against the other ~78% of that index, as LAX= 21.8%). For those who believe that the California regions will move in tandem, LAX could be a proxy for ~38% of the CUS 10 city index (SDG=5.5%, SFR= 11.8%). As such, the CUS_LAX IC spread might be viewed by some as a call on the 38% California vs. the 62% non-California exposures. Since the three Northeast regions (BOS 7.4%, NYM 27.2%and WDC 7.8%) constitute 42% of the CUS index, some might argue that CUS_LAX is another way of debating LAX_NYM.

The table to the right shows that- unlike the last few years – LAX forward index levels (as evidenced by CME futures) are priced to perform about the same as the CUS index. The simplistic analysis above would convert the -40.0/-35.0 IC market into the bidder paying a level that would have CUS underperforming LAX by 1.4% between now and Nov 2016, while the seller is offering at a level where CUS would outperform LAX by 0.9%. Over the last two years the LAX index is up 24.3% while the CUS index only rose 14.2%. For the Nov 2016 IC spread to trade at ~even gains over the next three years, one of the two series (CUS, LAX) will have to change pace dramatically.

4) Finally, I list options here only as a keep-in-mind strategy. There have been no longer-dated option trades since electronic trading was re-introduced in the spring of 2012. However, LAX (as well as CHI, CUS and NYM) are electronically traded so a platform for trading options strategies exists. While outright markets involving unlimited tail risk would likely be quoted with very large bid/ask spreads, there may be some interest in a form of intercity straddles and/or strangles. Traders may have views on relative volatility or differences in the shape of the tail risk between, for example, NYM or CUS and LAX indices. Others, looking to lock in gains, or bet against large further run-ups might want to buy puts or sell calls. I’m happy to make notice of any posted quotes that are brought to my attention.

Net, there are four ways to frame the debate on where the Case Shiller LAX index might be in ~3 years. Trading outright markets seems more effective than paying real estate agents, finding tenants and securing mortgages. For example, the 241.0/249.0 LAXX16 market is about a 3% bid/ask spread with limited broker fees for a fungible, publicly priced, transparent, tradable position. Contrast that with an approach of finding houses, determining the true bid/ask spread, paying real estate agents to sell (or rent) your property, securing mortgages, all while tying up capital in a unique, non-tradable asset.

Calendar Spreads and Intercity markets are two other options for a trader to narrow in on pricing via a relative value approach.

I’m happy to help with any questions or inquiries. Feel free to contact me at johnhdolan@homepricefutures.com

Oct month-end recap (published)

I’ve updated several links on the Reports page that will take readers to:

A 16-page recap of activity in the CME S&P Case Shiller futures for October (here)
A set of graphs for the 11 contracts (here), and
A set of tables with prices a/o Oct 31 and Sept 30 so that one can see changes (here)

Here are some key highlights from October and the report:

2-sided prices on all 121 contracts (11 regions * 11 expirations) have been the norm since early Oct. This is the first time I’ve been able to report that in over a year. Bid/ask spreads are wide in certain contracts but a “full picture” of all contracts is now available. Thanks to those who contributed to this effort.
Trading volume (68) was the highest since May 2012. It seems that turns in the market, or more precisely, differences of opinions in whether the market is about to turn, are what today and May 2012 have in common.
Open interest rose to ~150 but much of that is concentrated in Nov 2013 expiration.
The largest single trade (24 lots of CHIX13) in my 3-year memory of the contracts, occurred the day before Case Shiller numbers for August were released. While I’d love to eventually see the contracts more used for longer-term hedging, having a venue to express difference in how recent housing data might be interpreted is also worthwhile.
Once 2-sided markets began to appear, traders started to bring down offered side on longer-dated California markets. This brought implied HPA’s from near 10% to mid-market quoted levels closer to other contracts. There’s much more work to be done on longer California contracts. Any help would be appreciated.
CUS and NYM series remained tight for much of the month and saw isolated longer-expiration trades.
A smattering of inter-city quotes popped up based on the relatively tight bid/ask spreads in CUS and NYM. This should be a fruitful area to accommodate further spread tightening.
CME moved from Data Suite to E-Quotes in their distribution of quotes on housing contracts. Live prices are currently available via EQuotes (check out free trial) and other data vendors (e.g. Bloomberg). The CME has made some noises that delayed prices might be posted on their site some time in the next few months. In the meantime I will report on delayed/stale prices either periodically or after significant market moves.

I’d be happy to discuss these observations, or any aspect of trading in the CME S&P Case Shiller futures, in more detail. Please feel free to contact me at johnhdolan@homepricefutures.com

Market color- post October release of August Case Shiller indices

Quotes on the CME Case Shiller futures generally (with the exception of LAX and SDG) moved lower today after this morning’s release of the August Case Shiller indices. Bids tended to drop more than offers leading to wider bid/ask spreads. The spread widening more was more pronounced in longer-dated contracts. By 1 PM (NY) there had not been any trades.

The table to the right shows the prices, and price changes for the CUS contract. There is a table for all 11 contracts in the Reports section or readers can link to it here.

(The CME is no longer posting free, real-time prices to their website. Prices are available on E-Quotes (click here for link to trial subscription), Bloomberg and other data vendors. My CME contacts are hopeful that 15-minute delayed prices will be available on a CME website sometime in the next few months. In the meantime, I’ll try to provide (delayed) color on significant price moves, at month-end, and as trades happen.)

Some notes:

The expected battle in CHIX13 (after 26 lots traded yesterday) didn’t happen today. The CHI index for August was 127.68, just a hair below the range that I predicted might prompt a price reaction. Yesterday’s 129.8/130.0 close turned into today’s 127.4/129.6 market.
There was a revision to the NYM index series that makes today’s 172.46 value slightly stronger than it initially appeared.
In another trade yesterday, CUSG14 traded at 179.2. As this contract references the Dec ’13 CS index, the price represents almost a 13% premium over the Dec ’12 index. The bid for that contract has slipped today but the contracts are still pricing in a strong 2013 performance.

While bid/ask spreads are wider I remain optimistic that trading opportunities will exist. Differences of opinions, when market sentiment changes, tend to result in tighter bid/ask spreads and more trades. This occurred in May 2012 when the CS indices turned up. We have a similar situation today with prices in all 121 contracts, and different traders participating and offering quotes on both sides of the market. Typically the day of Case Shiller releases seems to be a “wait and see” day where traders see how prices shake out on the news. That’s often followed by traders contributing their thoughts (bids and offers) the following day and/or at month-end. Stay tuned.

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