prices – Page 5 – HomePriceFutures.com

Some Inter-city Quotes

Inter-city quote spreads may be a great way to express a view on the relative performance of two contracts for a given expiration. The outright level of home price moves may be reduced with a simulaneous buy and sell, execution risk is reduced as the buy and sell are done at the same time at a pre-determined spread, and the inter-city spread quote is sometimes tighter than outright buy and sale.

Here’s a sample of recent inter-city quotes.

Recall that IC spreads are quoted just as calendar spreads with the front contract being bid (in the case of an IC bid) and the back contract being offered. So in the first quote, the bidder is offering to buy the HCIK13 (aka CUS) contract at 4.2 points above where he would simultaneously sell the MIAK13 contract. The reverse of that trade (a sale of the HCIK13 contract and purchase of the MIAK13 contract) is offered at 5.8 points. In effect someone wanting to express a view on the relative performance of the Miami contract versus the 10-city index (for May ’13) can do so in a relatively tight bid/ask spread. This view could later be reversed, or since both sides of an inter-city spread expire on the same day, run to expiration.

As both the HCI and MIA contract prices imply different price appreciation (or depreciation) relative to their respective spot indices, the HCI/MIA IC market is a way to express a view on how MIA will perform relative to the 10-city index. (I leave it to the reader to work out the math, but I would conclude that the 4.2/5.8 market brackets the MIA outperformance (vs HCI) to 0.21% to 1.26%.)

(Note: the 4.2 bid, and all other quotes in red are what I refer to as “arb” quotes. Those are automatically generated by the CME from outright bids and offers. Please contact me if interested to discuss possible inside quotes.)

In theory, IC bid/ask spreads should be tigher on a) shorter contracts, and b) contracts between highly correlated contracts. The later is especially useful as IC spreads can be used to take what might be a large risk (e.g. the outright level on the LAX contract in Nov. 2015) and reduce the risk by narrowing the question to the relative performance of LAX vs. SDG for the same expiration. As above, anyone wanting to express an opinion on the relative performance of LAX vs. SDG can express that via the IC spreads.

Inter-city spreads can be quoted between any two contracts with the same expiration. As such there are a ton (actually 2,420) of possible inter-city markets, and while some may not be meaningful, there are still too many to continually quote. Please contact me (johhdolan@homepricefutures.com) if you have a particular quote that you’d like to see (at inside arb levels) or if you have any questions on after reading this blog.

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

Recap of CME Case Shiller Futures –Post release of CS data –Feb. 26, 2013

(Murphy’s Law suggests that bad things happen at the worst time. Such it was for me yesterday when my website crashed. Here’s the comments that should have gone out yesterday afternoon. Now I just have to figure out how to revert to former font size.)

The CME Case Shiller Futures proved to be “spot on” in predicting the Case Shiller index numbers that were released this morning (written Tuesday). The bid/ask closing quotes on all 11 contracts straddled the actual index numbers.

The chart below shows bids/offers, the Case Shiller release, the mid-market value, and the comparison between the actual Case Shiller release and the mid-market.

Bid/ask spreads had ranged from 0.80 (LAV) to 2.2 (SFR, WDC) and averaged less than 2 points. (These spreads were a touch wider than other closes – but not by much . In prior months, debates (better quotes, trades) on expiring contracts sometimes drove the bid/ask spread below one point. This expiration there wasn’t as much “chatter” and therefore less need to unilaterally narrow spreads. Broader participation is encouraged as it has the effect of narrowing spreads.)

Not only were all 11 contract quotes “right” but in five of the contracts, the difference between the mid-market and the actual Case Shiller index was less than the smallest trading price unit (0.20). The last trade in the BOSG13 contract, on Feb 24^th, was 153.80, was within .01 of the actual index release.

Over the last three years the closing CME quotes have typically bracketed 6-8 index releases. (Sometimes bid/ask spreads were much tighter, sometimes there were index revisions, and sometimes the actual index results “jumped”). While I continue to believe that there will be trading opportunities around index expirations for traders with strong views, in general, this month’s experience should serve as an example that a market’s “view” -regardless of how thinly traded – should gravitate toward the expected results.

After the numbers were released this morning, bids generally returned but offers were higher. The West Coast markets showed improvement, while the Northeast markets remained flat (or in the case of NYM, weakened). There was one trade in SFRK13.

With the expiration of the Feb 2013 contract, the CME rolled out a new contract for Aug 2014.

Feel free to contact me directly (johnhdolan@homepricefutures.com) if you have any questions related to today’s markets.

Price Changes for early 2013

The price quote changes since Dec. 31 continue trends that persisted during the 4th quarter of 2012. This table (excerpted from a much larger table in the Reports section showing all 11 contracts) shows the price changes for the HCI/CUS 10-city contract since year-end.

While it’s easier to show one table, one has to be careful about assigning observations from this 10-city average to the underlying regions. In fact the trend of “A tale of two regions” has persisted since Q4 and into 2013.

While there have been few trades, quotes on the “warm” states (the 3 California markets, Las Vegas, and Miami) show higher than average increases, while the “cold” states (BOS, NYM, WDC, CHI and DEN) have tended to show lower increases and outright declines.

For example, using YTD changes in the Nov 2014 (X14) contract, bids have improved in LAV (+4.2), LAX (+2.8), MIA (+2.8), SDG (+4.0), and SFR (+6.0). By contrast, BOS (-1.2), CHI (0.6), DEN (0.0), NYM (-3.0), and WDC (-2.0) all show continued relative and/or outright weakness.

So, while the bid on the CUS contract is +2.0 since Dec. 31, only two contracts (LAX, MIA) have price changes that are within two points of that “average” change. We have more of a bi-modal distribution where the mean may not be terribly….meaningful (at least to traders in each region).

A continuation of these trends would suggest that inter-city spread trades within the two larger regions (warm vs. cold) could be done on smaller bid/ask spreads, while inter-regional, inter-city spread trades (warm vs. cold) might have some additional risk (and wider bid/ask spreads) while this divergence plays out.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have questions on this blog, or the report showing tables for all 11 contracts. I’m open to hearing thoughts/ trade proposals on any inter-city spreads.

That said, I expect that the focus will be on the Feb ’13 contracts that expire on Monday. Bid/ask spreads have compressed to ~2.0 points (on average, CUS =1.2). Inter-city spread trades are another way to play the expiring contracts. I’m open to ideas there also.

CME Futures: Post Case Shiller release

The futures markets are generally unchanged after this morning’s release of the Case Shiller indices, although there is a mix of up and down markets.

I’ve posted prices that I’ve observed over the last 24 hours. (That is these are neither fed by the CME, nor are they live.) I’m showing prices for Jan 28 and Jan 29 for the CUS contracts to the right. (See the reports section for a table with the changes on each contract.) Typical of many contracts the bid/ask spread has widened as (in this case) some bids are lower, while some offers are higher.

In aggregate bids are about 1/2 point lower, while offers have averaged 3/4 point higher.

Futures price reflect changes in the indices with two notable exceptions that I highlighted yesterday. The CHI index came in 113.35 or 1.53 points lower, but the Feb contracts, which had traded as low as 110.2, have rallied to 111.0/113.6.

Conversely, the LAV index came in at 100.56 or +0.42, but much weaker than “expected” by the 103.4/106.0 Feb market on Monday.

The CHI/LAV trade discussed yesterday would have been the biggest 1-day mover.

The only trade, in fact has been a pair of trades in front LAV as LAVG13 traded at 103.0 and LAVK13 traded at 106.0. (Both are now offered at those levels.)

California markets continue to perform well. LAX, SDG and SFR should all have higher closes by the end of the day, while Northeast markets suffer. BOS, NYM and WDC are all lower, although index revisions in NYM and WDC account for some of the price change.

The Feb front contract now has one month to run. All bid/ask spreads are between 2 and 3 points. I expect those contracts that traded tighter yesterday (e.g. SDG and CHI) to tighten over time.

There are occasional 2 lot bids, but 90+% of the quotes seem to be for one lot.

There are bids for 115 of the 121 contracts (11 regions * 11 expirations) and 100 contracts have offers. The CUS contract is the only one with bids and offers for all expirations, although BOS, DEN, LAX, NYM, SDG, SFR and WDC are all missing no more than 3 (of 22 possible quotes).

I will try to update observations on calendar and inter-cty spreads tomorrow.

Pre-Jan Case Shiller release

The January release of the November Case Shiller indices will be watched closely tomorrow for possible signs of future trends.

While prices over the last few months have drifted higher, some commentators have been calling for a retrenchment based on either seasonal factors or that prices have moved too fast/too soon/ given home price fundamentals.

The CME Case Shiller futures have an unusually large dispersion of forward prices (relative to spot) across the regions. This may either reflect the growing lack of correlation across the various regions, and/or the debate about overall home prices. The chart above shows recent historical index levels, and the bid, ask and mid-levels for the 11 Feb 2013 contracts. It also shows the percent difference between the most recent Case Shiller index and the mid-point of the G13 (Feb) market. Note that on the one hand the LAV mid-point is ~4.6% above the spot index, while the CHI mid-point is ~3.5% below. Four other regions show Feb mid-points that are below spot, while four others show prices that are above (w/DEN essentially flat). As such, traders will be looking at the Jan numbers to see if their negative or positive sentiment for the February contracts is warranted.

There should be good opportunities for trading. Bid-ask spreads (shown inthe chart) average 2.6 points with CHI the tightest at 1.0 (although SDG was 0.6 for much of last week), and LAX the widest at 4. In addition, there have been some inter-city spread quotes posted. (Anyone interested in CHI verus LAV?)

With all of the focus on January numbers, I’d be very open to people sharing their expectations (before 6 PM tonight). I’ll tout the best predictions (if you want) but let the others remain anonymous. Send your numbers to johnhdolan@homepricefutures.com if you want to be able to brag on Tuesday.

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.

Basics: Why are there more bids than offers?

Anyone tallying the number of bids and offers for all 121 CME Case Shiller futures (11 regions * 11 expirations) should notice that over the last few weeks there’s been more bids than offers. (Today we’re at 93 bids x 73 offers. That number of quotes is down from all 121 x 121 during the spring but up from 40 x 40 during the late summer). Does this reflect more bullishness or is there some other factor at work?

My sense is that it’s more of the later. I’d volunteer that I work to make sure that closes don’t drift too far away from a range in which I think a contract “should” trade. So, for example, I entered five of today’s bids in a series of SDG contracts (X13,X14, X15, X16 and X17) a) to buy contracts, b) to invite others to post offers, and c) to raise the closing price.

Recall that the close is calculated as the last trade, unless there’s a higher bid or a lower offer. In contracts where there have been infrequent trades, and where the last bid is either very stale, or none exists, the closing price won’t change (absent lower offers). Over time in a rising market, the close then will tend to lag my sense of the range where a trade would be more likely to happen. Higher bids, as we have today, will lead to higher closes, and hopefully more information in the time-series of closing prices.

Note that this is the same situation that the home price contracts were experiencing in 2008-09 but in reverse, that is, in a declining market. In those days, the consensus on the “expected” clearing level for the next trade kept dropping, but without active market making (and the posting of lower offers), closing prices remained very high.

Anyone thinking that the closing prices are still out of line is welcome to post new bids or offers. The CME protects against manipulation of the close (e.g. a last minute off-market quotes) so closing prices and margin are not distorted.

So, my sense is that as long as the market continues to rise, you should expect to see more bids than offers.

I’m happy to discuss

Might less be more?

Today’s blog headline reflects my ongoing thinking process as I transition to focusing on fewer expirations. In economic-speak, I’ve long worried that having 11 contracts, with 10-11 expirations, calendar spreads, inter-city spreads, options (for a while), and having quotes live 21 hours/day results in negative marginal utility – for a contract with limited volume. (It seems similar to having a 68th flavor of ice cream at Baskin Robbins. It may be great for marketing but it makes inventory management that much harder). What works for the S&P 500, $/Euro, and Treasury note futures trading may not be optimal for these contracts.

So, today I’ve switched my efforts to focusing on the November cycle of expirations (plus the front two contracts). My guiding thoughts on this move (and the earlier focus on Tuesday morning trading and limiting an options roll-out to four contracts) is that until trading volume increases, it will be important to channel any interest in home-price index trading to a more limited number of expirations. (Recall that over 3/4ths of the open interest is already in the November cycle of expirations, and that November has typically had the best markets.)

In to trying to focus fragmented trading interests, I would rather give more attention to the level of home-indices, and the implied HPAs (via calendar spreads) than to focus on the seasonal factors that impact the Feb, May and Aug contracts for the regional contracts.

My hope is that by narrowing my focus of contracts (by not posting my own daily quotes on K13, Q13, G14, K14 and K15), that other traders will also concentrate their attention on the remaining expirations thereby creating a deeper market. The issue of “depth of market”, whether in the form of posted volume, or the number of contracts a trader can expect to trade at a particular level, has long been on the top of any negative comments list about this market. In sum, it is my view that the overall Case-Shiller futures markets, would be better served with fewer 3×3 (# contracts bid/offered) markets than >120 1×1 markets.

In the past two years, better markets -either tighter bid/ask spreads, or quotes for larger amounts – has led to greater volume. (I sense that it’s a virtuous circle that more trades leads to better quotes which leads to more trades. This narrowing of my focus is an attempt to re-jumpstart that virtuous cycle.)

At first , you might notice an initial absence of quotes (or wider quotes) for the Feb, May and Aug expirations on the ten regional contracts. (I hope to continue populating quotes for all expirations on the CUS 10-city index for those interested in seasonal price moves). The contracts are still trading. I hope to post a set of all-expiration quotes from time to time, and will be happy to respond to an inquiry on one of these expirations. Other traders already have some quotes in these contracts (outright or via calendar spreads). While I would be happy to have someone else come in and “fill in the blanks” I’d encourage any marginal interest be channeled into the Nov. cycle contracts.

My hope is that, in time, the increase in trading in the November expirations will create demand for better markets in the other expirations.

As with any post, please feel free to contact me johnhdolan@homepricefutures.com if you have any questions on this topic or any aspect of home-price derivatives.

The Turn

With the turn in most home price indices, CME Case-Shiller futures have turned higher -particularly in the front contracts.

The graph below shows the value of each of the 11 CS indices as a percent of the most recent spot index. Values to the left of July 2012 are the historical CS index indices, while values to the right are those for the mid-market of the CME futures. (The black square is the spot price divided by the spot price or 100% for each index).

Note that the turn began in earnest with the June CS release. The July index saw month-on-month increases of as large as 3.9% (for SFR) and the August contract values center around another ~2% increase (for CUS). Nov 2012 mid-market prices are 4-5% above spot.

Much of the “pop” in futures prices occurs in contracts that expire over the next 6 months. After that, both calendar spreads and mid-to-mid market prices suggest modest ongoing home price gains. As such, the rally in nearby contracts is consistent with many research reports that price rises are potentially a function limited inventory, a change in sentiment, and some investor money entering distressed markets. The back contract prices suggest that this price surge is due to such short-term factors and does not represent a return to 4-5% annual home price increases.

With the abrupt change in prices on the front end of the futures curves, bid-ask spreads have widened and trading volume has declined. (July saw 10 contracts traded versus 83 in May -the largest in a few years). I would expect that the CS indices need to settle down, and we need to get past Labor Day, before bid-ask spreads tighten up to prior levels.

One additional observation is that while the short-term price histories of the CS indices are quite varied (since Nov 2009), the futures contract prices seem to move in unison. This high degree of correlation seems to be at odds with the notion that different parts of the country will rebound at very different rates. I would suggest that the combination of wide outright bid-ask spreads, and the high degree of correlation in futures prices, makes this a ripe environment for inter-city trading. (After all a trader may disagree that CHI, for example, will be +10% (over spot) by Nov. 2013, but that trader may have very strong views on CHI vs the CUS index, or other cities.) I hope to blog on inter-city axes (and am willing to tout any inquiries I receive) in a later blog.