Tag: research

Jan Recap posted

I posted a recap of activity in the CME Case Shiller (home price index) Futures for the month of January to the Reports section (or you can click here).

The highlights of the month include:

  • Increase in volume (albeit only from 8 to 15)
  • Modest increase in OI
  • Slight uptick in average prices (more so in SFR, less in SDG)
  • Large tightening in bid/ask spreads across numerous regions and expirations
  • New page showing selected intercity spread quotes
  • New table showing mid-mid % price difference (~HPA) by year, from 2014-2018 across all contracts

I also posted on page 2 a notice that the CME has posted the CUS contract (but not the regions) on their website.  (Regional prices may take a some time.)  While not the “free” bids and offers that some traders were used to from 2012, this effort puts the housing contracts at parity on free price information disclosed with other CME contracts.  (It’s up to us to fill in changes).

Enjoy the recap.  If you find this of value, please feel free to donate to my Bitcoin account (see bottom of homepage).

As always, if you have any questions, or would like to see some particular area discussed, or trade idea touted, in more detail, contact me at johnhdolan@homepricefutures.com

 

Recap post CS #’s, April Month-end report

Prices for Case Shiller futures largely tracked changes in the index numbers released Tuesday (April 30th) morning.  The California markets were generally stronger, while DEN and CHI lagged on weaker index numbers.  Mid-market levels for the California (and LAV, MIA) contracts continue to improve, while the northern markets (BOS, CHI, NYM and WDC) are about flat versus year-end.  NYM markets notched higher as a result of the slight index increase which compared favorably to other northern regions (e.g. NYM 0.4% Month-over-month, versus 0.1% BOS, -0.8% CHI and -0.5% WDC).  There were 8 trades on Tuesday (across several regions in 2013 contracts), which unfortunately was the majority of trades for the month.  Bid/ask spreads contracted another 2 points (after coming in 1 point in March) and quotes now look comparable to last spring’s levels.

All of the information I have about the contracts has been compiled into a 16-page month-end recap which is in the Reports section or one can access here.  Information on prices, open interest, volume, spreads, forward prices and a reminder as to where to find market updates are all included.  PLEASE feel free to forward a link to the report to anyone interested in home price derivatives.  Save the link and/or download the report onto your IPAD.

Looking forward, I am disappointed by current volume, but recall that tighter spreads, and quotes on all contracts (which we now have) are good pre-conditions for growing volume.  I remain optimistic that inter-city spread trades (and a revival of calendar spreads) could be the catalysts for more trades.

So, once again, please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions from the report, or care to debate the value of contract prices.

 

Report recapping March CME Case Shiller futures markets

A 16-page report highlighting many aspects of the CME Case Shiller futures markets (e.g. volume, bid/ask spread, price changes) is available in the Reports section or by clicking here

Trading picked up (albeit to still low levels), open interest rose back above 100, and bid/ask spreads narrowed by 1 point (although still much wider than Spring 2012).

There are a number of charts, tables and graphs that those  who follow the contracts might find interesting (or at least useful

Basic -Year End Prices

Here’s a table of year-end bids and offers for the CUS Home Price futures. 

Trades on Dec 31st helped tighten up Boston quotes. 

Four contracts (BOS, CUS, NYM and SFR) now have quotes for all expirations.

The average bid/asked spread for all Nov ’11 contracts is 5.4 points.  There are six contracts for Nov 2012 with bid/asked spreads <7.5.

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!

Boston Bubble website

One of the upsides of blogging, and focusing on a single topic, is that you get introduced to, or stumble across others, who share your enthusiasm for a topic.   As such it was my good fortune to run into the folks who have put toghether www.bostonbubble.com.  While there are many sites that bang the drum on bearish views, this site has -for 5 years – pulled together headlines and forum topics with some great analytical support.  While some of the focus has been very neighborhood-specific, they have also used the Case-Shiller Boston index, and CME Boston contracts to ground discussions about history and expectations.

As evidence of their work  I share here one of their graphs where they overlay CME contract prices at various points in time versus a combination of the Case-Shiller index and recent (this was in May) CME prices.

The graph is interesting because while it highlights the relatively slow changes in the underlying index, it show how expectations (I think the mid of bid and offer) might have changed more quickly during 2007-08. 

(My expectation is that with forward contracts getting more attention, that price jumps will be smaller, and forward curve volatility will be lower.)

Check out their site, especially the forums.  Good work Tim.

Basics – CUS 10 v CUS 20

A number of people interested in following the Case Shiller indices have focused on the 20-city index. While this is a broader index, the CME contracts are on the 10-city index.  Therefore, if you’re going to trade the CUS contract, it’s important to know the differences between the two indices.

While the CUS-10 index has many of the larger cities, it is not a blanket list of the top 10.    The list to the left shows that Detroit, Dallas and Atlanta are all excluded from the CUS-10, while smaller cities such as Denver and Las Vegas are included.    Nevertheless, ten cities comprising the CUS-10 account for more than 71% of the CUS-20.

The CUS-10 has outperformed the CUS-20 since the indices were benchmarked at 100 in Jan. 2000, with the CUS-10 valued at 159.36 (as of the July release of the May indices) and the CUS-20 at 146.43.   However most of that 11.7% outperformance came in the first four years.

Since Jan 2004 the CUS-10 index has declined 2.2%, while the CUS-20 has almost matched that with a decline of 3.5%.  The oft-cited woes of Detroit and Cleveland, that are counted in the CUS-20, have been offset by the strength of cities in the Northwest (Portland and Seattle.)

Furthermore, since the CUS-10 accounts for such a large percent of the CUS-20, it shouldn’t be surprising that the two move together.  Since less than 30% of the CUS-20 doesn’t overlap with the CUS-10, you’d need some pronounced movements in the remaining ten cities for the indices to diverge dramatically.

The other major difference (than size) between the two indices is kind of red state vs. blue state syndrome.  That is, the CUS-10 has three cities from the Northeast, and three cities from California.  The “other” ten cities in the CUS-20 index tend to be more Mid-America with exposures to the Southwest (Dallas, Phoenix), the Southeast (Charolette, Atlanta, and Tampa), and a broad definition of the Mid-West (Cleveland, Detroit and Minneapolis).

Any pronounced difference in performance between the CUS-10 and CUS-20 index would have to be based on these two features: size and location.  Given some extreme risks(earthquake, terrorism, rising sea levels) one might find fewer risks in the CUS-20 index.  On the other hand, as globalization continues, or foriegnors look to invest in US real estate, the larger cities might outperform.  While the smaller cities might have more low-income borrowers, at least there’s lending going on to non-jumbo clients.  Who’s going to lend $1mm on a starter home in Palo Alto?

Net, I’d be surprised to see big differences over the next few years.

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.