Tag: prices

CHIX13 trades: What to look for Tues morning

There has been unusually high volume in the CHIX13 (Chicago Nov 2013) contract over the last few days.  Today (Mon. Oct. 28)26 lots traded at 130.0, following another 10 trades over the last few days between 130.0-130.4.  I imagine that traders involved have some expectation (and possibly disagree) as to what the Oct release of the CHI Case Shiller index will show.  After all if we have the September release (125.69) and the November contract is trading at 130.0, the question might be: what path will the CHI index take through October?   We’ll know tomorrow morning.

The following graphs attempt to frame one way that traders might be framing their expectations.

I would imagine that traders bidding for Nov contracts would be surprised if the CS release was not at least 50% of the interpolation of the Sept index and their Nov bid.  That is, if the Oct index comes in below 127.7, to get to a value of 129.8 in November, the Oct/Nov gain would have to be higher than the Sept/Oct gain.  Given seasonal factors and fear of possible declining momentum in home price increases the 129.8 bidder might would want to see at least 127.7 to feel comfortable maintaining his bid tomorrow.

Similarly, the 130.0, offer might expect some gains from Sept to Oct, and may even be comfortable with a straight interpolation from the index to their offered level (so 127.85) if they believe that upward momentum will slow from Oct to Nov.  However, if the Sept-Oct gain is more than some threshold (and here I’ve arbitrarily used 60%) of the Sept-Nov interpolated gain, then he may even be comfortable up some higher level, in this case 128.3.

However, given this logic, I would imagine that any CHI index result outside the 127.7-128.3 range will see the bid or offer change before trading starts tomorrow.

Given the recent volume, the narrow bid/ask spread, and the open interest, I would expect more trades in CHIX13 tomorrow.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this report, or any other aspect of hedging home prices or home price indices.

 

Mid-Month color

With half a month behind us, and now with all 121 contracts having some prices, it might be appropriate to spend a few minutes reviewing recent trends in price quotes for the CME Case Shiller futures.  While there have been few trades, there has been some notable price changes.

The following two tables illustrate my notes contrasting recent market and month-end prices.  (Three qualifiers-1)  these are prices I observed, not necessarily CME quotes at any time, 2) the recent quotes may no longer be current, and 3) the first table is muddy due to my limitations in pasting Excel-generated work into WordPress.  There is a higher resolution in the Reports section.  Any help in teaching me how to better use WordPress would be appreciated).

Both tables show that there have been better offers in the longer-dated contracts, which has tended to reduce bid/ask spreads- particularly in the California contracts and the off-cycle (e.g. G15, K15, K16) contracts.  The lower offers in the X16/X17 contracts are consistent with a switch in expectations of 10%HPA for the next four years, to a reversion to more “normal” home price appreciation.  While bid/ask spreads for the front contracts (e.g. 2.8 for Nov ’13) are in-line with past expiration cycles, longer-dated bid/ask spreads remain historically wide (with the exception of CUS and NYM).

Net the price changes seem to be reflective of a willingness for traders to at least make some offers at some prices, which is a notable change from July-August when the markets reflected one-side bullish sentiment.

I would note, and will blog later, that prices in some of the longer-dated California contracts are a function of inter-city spreads.  While IC spreads are always a great platform for debating relative strength of one region (or CUS 10-city) versus another (see the CUS/NYM debate in recent blogs), they are especially useful in today’s markets where one leg (e.g. CUS) has a very tight bid/ask spread, and by composition, is highly correlated with another market (e.g. LAX which is ~21% of the CUS index) that has a wide bid/ask spread.

Feel free to ask questions (johnhdolan@homepricefutures.com) and stay tuned for the next blog on examples of inter-city spreads.

 

Sept Recap for CME Case Shiller futures

With the Robert Shiller article in the NY Times, and some help from other traders in populating Sept 30 quotes, I’ve been able to pull together a recap of trading in the CME Case Shiller futures for the first time in a few months.  The recap is in the Reports section or can be accessed here.

Highlights include:

  • Highest trading volume since June 2012
  • Breakeven to 100% retracement (for CUS index) to 2006 highs moved up to 2018
  • Lower offers on longer-dated contracts leading to tighter bid-ask spreads and lower implied HPA in calendar spread markets
  • Open interest by contract/expiration
  • Graphs of all 11 contracts
  • Price changes Sept vs. August

Please feel free to contact me (johnhdolan@homepricefutures.com)  if you have any questions or would like to see other information.

Introducing G15 (Feb ’15) contract and G14/G15 calendar spread

As I mentioned in Tuesday’s blog, with the expiration of the Aug ’13 contract, the CME introduced a new contract for Feb ’15 – the G15 contract.  While the Feb cycle has always had the lowest open interest of the four quarterly expirations (the longest maturing Nov cycle gets most of the attention), it has the potential to play a very important role in conveying views on year-end vs. year-end comparisons.  Recall that the Feb ’14 contract references the Dec ’13 Case Shiller indices, and the Feb ’15 contract references the Dec ’14 indices.  As such, the Feb ’14/Feb ’15 calendar spread may convey some information on traders’ expectations of HPA for calendar year 2014.

I say may as while all CME prices eventually converge to the corresponding index, prices on any contract may vary away from market expectations.  Traders may have outright positions that they want to put on/ take off/ square up/ and may be motivated to trade at levels away from “fair value” (if a) there is such a thing, and b) it is even known to the market). Calendar spreads – which involve taking two positions simultaneously – may have additional reasons to trade away from fair value.

That said, for those with patience, I think that calendar spreads represent one of the best options for freely viewing  continuous HPA expectations and for expressing a (financial) opinion.

To start the discussion on the G14/G15 calendar spread, I posted a -11.8/-8.2 bid/ask spread.  Recall that a -11.8 bid means that the bidder will buy the front contract (G14 here) 11.8 points below the level that they will simultaneously sell the back contract (Feb ’15 here).  The -8.2 offer is willing to do the opposite (i.e. sell the front contract 8.2 points under the level that they will buy the back contract).

These bids and offers may be more meaningful when converted into percentage terms consistent w/ HPA.  A -11.8 bid versus a 180.5 midmarket on the Feb ’14 contract is 6.5% (after reversing the sign), while the -8.2 offer equates to a 4.5% difference. Thus in framing the discussion over the G14/G15 calendar spread, I’m suggesting that the debate on 2014 HPA (on the CUS 10-city index) should take place between 4.5% and 6.5% HPA assumptions.

The beauty, strength and value of publicly traded markets is that the numbers are free for all to see, and that anyone can choose to disagree without having to find the person with whom they disagree.  Anyone with a strong view that 2014 HPA (on CS 10-city index) will be outside the 4.5-6.5% range may want to consider a trade.  Anyone looking to (financially) express a view on some number inside the 4.5-6.5% range is invited to submit a better bid or offer.

The same exercise can be taken on each of the underlying ten regional contracts.  I hope to get to some of them, but I would expect that all will be positive HPA (as of today) and those that have been strongest recently will have prices that reflect continued out-performance.

I’ve mentioned above, and want to highlight here, that this exercise applies to the Case Shiller 10-city index.  Different indices, calculated under different methods, reflecting a different universe of home prices, may have different HPA for 2014, and one shouldn’t use calendar spreads on Case Shiller indices to infer HPA expectations for other indices.

Feel free to get in touch (johnhdolan@homepricefutures.com) if you have any questions on this blog, if you want some regional calendar spread discussed, or if you care to discuss any aspect of hedging home prices.

 

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 month-end recap posted to Reports section

I’ve posted a month-end recap of issues related to trading in the Case Shiller (home price index) Futures to the Reports section (or you can link here).   The report has many of the usual data, graphs and tables, on trading, open interest and prices,  but as there was not a complete set of bids and offers at month-end, some of the graphs (from prior months) are missing.

The graph to the right tells most of the story for the last year.  Prices (as measured by mid-markets) continue to move higher.   While back-month price moves are consistent with a change from 3 to ~4% HPA, it is the move in the front contracts that has contributed to the recent upward shift in the curves.  Aug ’13 (Q13) and Nov ’13 (X13) quotes reflect a further significant jump in index values (most likely based on the time of year (seasonal factors) and recent change in sentiment.)  Expect Wall Street forecasters to raise their 2013 predictions if the Feb ’14 contract prices are reflective of expectations.

I would note that I’ve added a purple line to this graph that represents closes.  I included it to show how, in a strongly rising, thinly traded market, closes are often just the best bid.  (The same phenomenon held true as the markets sold off in 2008-09 where recent offers often defined closes.)  As such, you may see bids inching higher to (among other things) bring closes more in line with mids.

Another casualty of trending markets is that bid/ask spreads tend to widen (or the offers disappear), and trading slips to near zero. That has recently been the case here.

I’ll have more to say on that, and other issues in the report in future blogs.  For now, I just wanted to get this out ASAP.

Feel free to forward a link to this blog (or the Report) to others studying the contracts.  As before, anyone is welcome to contact me (johnhdolan

Recap of price changes post March release of CS #’s

The Case Shiller indices for Jan 2013 were released on Tuesday March 26th.  Much of the reaction in the CME prices was concentrated in the front (May 2013) contracts.  (A table of before- and after- prices for the CUS contracts is shown here, and a table of price changes across all regions is included in the Reports section or can be linked here. )

This Bid/ask spreads for the K13 (May 2013 expiration) that had averaged ~1.9 points moved out to 3.3 on index “surprises”.  That is, certain index results (e.g. NYM, MIA) were slightly stronger than prices suggested by the May 2013 contracts, while other (e.g. SDG, WDC) were weaker.   As a result the most pronounced CME price moves were in front-contracts in these four regions.  NYMK13, which had been 158.4/158.6 before the numbers traded at 162.0, and MIA improved from 151.8/154.0 to 153.4/156.8.  On the other hand, SDGK13 dropped from 165.4/168.6 to 162.8/167.8 while the bid/ask widened.

The widening in the bid/ask spreads of the front May 2013 contracts, spilled over (via calendar spreads) into wider bid/ask spreads in the May 2014 and 2015 series.

On average bids were up 1/4 point (across all regions), while offers were up 3/4 for overall slight improvement in prices and a general widening in bid/ask spread of 1/2.   66% of this widening occurred in the three May contracts (out of 11 total).

The BOS and SFR contracts were the only two contracts to show tighter bid/ask spreads (across all 11 expirations) post the CS index release.  (Thanks to those contributing quotes!)  BOS spreads compressed as bids raised while offers lowered,  while in SFR bids generally increased more than offers, and longer-dated offers in SFR dropped.

Spread widening in four contracts (DEN, MIA, NYM and WDC) accounted for 100% of the overall spread widening (help would be appreciated!)  As noted above, most of that widening was in the May series.

Having moved one month closer to the May expiration, I would expect that bid/ask spreads will compress in the May 2013 contract.  I hope to post a blog on inter-city spread quotes that might help there.

The other “angle” that I expect to develop is that the recent trades in the CUSX16 and X17 contracts have given some possible anchor to longer-dated contract values.  The debate as to factors behind home prices four years from now (e.g. new construction, revival of RMBS market, supply of shadow inventory as prices grind back toward 2006 levels, clarified role of GSEs, changes in lending standards, impact of possible removal of mortgage interest deduction, and level of mortgage interest rates) should all weigh on prices for the Nov 2016 and 2017 contracts.  I would expect (and hope for) some interest in calendar spreads and longer-dated inter-city spreads.

Please feel free to contact me (johnhdolan@homepricefutures.com) with any questions about the attached data, or any aspect of housing derivatives.

 

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.

Early front contract tension -tight bid/ask

While sometimes it seems that traders wait for the front contract to have weeks to expiration before showing tighter quotes, trading this cycle looks to be different -and better.  Thanks to broader participation, widths of bid/ask spreads for the front contracts are inside those posted even the day before the Feb contract matured.  Not only are quotes tight, but the correlated expectations that dominated spot-versus-front contract prices across the regions, during the past summer is history.

I normally save this table for the run-up to contract expirations.  Given recent activity, it’s worth reviewing even with 2+ months to the Case Shiller release data that will be used to settle the March contract.

The table shows selected historical Case Shiller indices, and the recent CME bid, ask, and mid-market levels for all 11 March 2013 contracts.  The table also highlights the percent change between the mid-market price and Case Shiller indices from one year before expiration, and the spot index.

Bid/ask spreads are <= 1.0 point on 6 of the contracts.  I am aware of trades within the last few weeks in all 6 regions (w/ the exception of BOS), thereby giving further credence to the notion that tight spreads lead to trades, and that trades lead to tight spreads.  Only LAV and LAX (two of the contracts with the largest increase versus spot) are quoted wider than 3 point bid/ask spreads.

As big a story is the patchwork of percent returns (both 3-month and one-year) implied by mid-market quotes.  The regional diversification that is the hallmark of real estate brokers (“location, location, location) and the foundation for rating agency diversification models, is kicking in (just as volume in new RMBS deals is growing).

March mid-market prices are consistent with one-year returns that range from -2.25%(NYM) to +17.85% (LAV).  Mid-market quotes for March are consistent with four regions showing negative 3-month returns, while 6 are up.   That the CUS10 index quote suggest that overall prices will be about unchanged, hides the real story.

While traders are free (and encouraged) to express outright views, I continue to believe that (and am starting to see more use of) spread trades (both inter-city and calendar) as a way to reduce risk.  The pronounced seasonality in the March-June contracts has given rise to some sharp projected increases during the spring (even in contracts currently under pressure.)

As always, please feel free to contact me (johnhdolan@homepricefutures.com) if you’d care to discuss any aspect of this blog or trading in housing derivatives.

I would add that, to the extent I can, I will try to tweet trades (@HomePriceFuture) when I see them (but since the contracts are open 21 hours/day I may miss a few).   I would also encourage interested parties to join a relatively new LinkedIn group “CME Case Shiller Home Price Futures” if they’d care to chat with others interested in these markets.