sfr – Page 3 – HomePriceFutures.com

SFRX16/X17 – a Calendar Spread worth pondering

While I may not be swayed by one trade, I can clearly use it to talk about it as a market-clearing event that others might want to discuss, and possibly (hopefully) react to.

Last week there was a calendar spread trade in SFRX16/X17 at 8 points. Recall that a calendar spread is where a trader enters an order to simultaneously go long one contract conditional on being able to short another at a given spread. For calendar spreads this allows someone to enter a trade to express a view on the difference in value between two expirations (among other reasons). A trader entering such a trade may have a view not on the absolute level of future prices, but on the rate of change between two dates. (Similar logic can also be one of the rationales traders use to enter IC (intercity) spread orders.)

While calendar spread trades are quoted in points, I find it useful to translate price differences into percentage differences. The chart below takes the prices for outright SFR contracts as well as calendar spread orders and tries to translate those into percentage differences. For example, the difference between the mid-market prices of the SFRX16 and X17 contracts (of 7.3 points) is 5.80% of the X16 mid-market level. However a trader can’t trade on mid-market levels. If one wanted to enter a long in one contract and a short in the other a trader could lift the offer on X16 (233.6) and hit the bid on X17( 237.0) for a spread of 3.4 points, or lift the offer on X17 (240.8) and hit the bid on X16 (229.6) for a spread of 11.2 points.

A much more efficient way is the calendar spread markets quoted on the right side. There the 7.2 bid (i.e. willingness to sell X16 7.2 points lower than X17) is consistent with implied HPA of 3.20%, while the 9.2 offer is consistent with HPA of 3.97%. Note that some futures platforms reverse the sign on these quotes.

But wait a minute -hasn’t HPA in SFR been averaging 10%. How can 3-4% implied HPA make sense?

The two main reasons might include: 1) that market prices are consistent with SFR HPA slowing dramatically, and 2) that the contracts are so thinly traded (and the quotes have no depth) that calendar spreads quotes are just wrong.

The following charts show year-on-year (YOY) changes to both the CUS and SFR indices (in black). It also shows the percent difference between forward contracts and either earlier indices (e.g. May 16 futures vs. CS index released in May 2015) or differences between two contracts (e.g. Nov ’17 vs. Nov ’16 calendar spreads). Bids (blue) and offers (in red) are highlighted.

The CUS chart shows that YOY gains have been running in the 4-6% range but that forward spreads are consistent with gains of 2-4%. This is consistent with many analysts who’ve called for smaller (but still positive) gains in home prices.

The SFR chart shows the 10% HPA gains from May 2015, but then shows a much more pronounced drop in forward HPA. While most forward calendar spreads have been mine (prompting traders for a reaction) last week’s trade of SFR X16/X17 at 8 points is consistent with the notion that at least one other trader thought that implied HPAs of 3-4% made sense (again a) for only one lot, and b) the trader may have had other reasons).

So, fans of SFR/ worriers of an SFR bubble, what will/should the HPA be (using the Case Shiller index) for the period between the X16 and X17 contracts? That debate has been going on for a while. We now have a data point in that discussion.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d care to discuss this or weigh in with a trade.

Basics _Bid Ask spreads for Case Shiller futures contracts

My last blog talked about which contract expirations get most of the (limited) trading. This one shows (see table below) where the tightest bid/ask spreads are (today). That’s important as the markets with the narrowest bid/ask spreads tend to be the ones with the greatest likelihood of a trade. After all, if a buyer and seller are 4 points apart the difference may be too much to surmount, or there may not be market events that would cause a buyer or seller to change their price so much very quickly. However, a market with a bid/ask spread of 0.20 points (the minimum price move) might result in trade should either side (assuming that the bidder is not the person offering) should either party changes their mind even slightly.

The table also shows that there are two-sided markets in all contracts out to Nov 2017, but after that only in a few contracts (ones that I think other traders might have an interest). (Note that a new Aug 2017 contract will appear when the Feb 2016 contract expires.)

The two tightest bid/ask spreads (by expiration) are highlighted in green, while the two widest are highlighted in red. I try to keep the CUS (10-city index) as always one of the tightest bid/ask contracts as CUS contracts are of national interest and they can be used as one side of Intercity (IC spreads). Bid/ask spreads are shown in points, so lower-priced contracts (e.g. CHI) might show up as one of the tightest contracts, but not necessarily on a percentage basis. Conversely, any higher priced contracts that show up on the tightest list, will be even more relatively tight on a percentage basis.

Bid/ask spreads tend to widen the longer the time to expiration, but not uniformly. As I’ve noted in other blogs the November expiration contracts are outstanding the longest, are the only contracts for hedging 3+ years, and thus tend to have the most open interest and tightest markets.

Some contracts might have wider bid/ask due to volatility (e.g. SFR) but some are wider just because they don’t seem to get much interest (e.g. DEN, and LAV).

I’d appreciate any help in narrowing any of these spreads with bids and/or offers or feel free to “adopt” one contract (or region) and make the markets yours.

Feel to contact me (johnhdolan@homepricefutures.com) if you like to chat about this table.

China Stock Market collapse/ West Coast home prices. Any impact?!?

The continued collapse of the China stock market and recent posts of a potential bubble in SFR home prices (a Housing Wire article reporting on Collateral Analysis call) raises the question of whether we might see a high tide/full moon/ repricing of risk in SFR market.
Some of the rating agencies (notably Fitch) have long argued that SFR home prices are above long-term sustainable valuations. However funds from dot-com IPO millionaires, wonderful weather, and a 24/7 lifestyle have continued to attract buyers.
Might the decline in China stock market spill over into West Coast home prices -particularly San Fran, Seattle and Vancouver (more on Canadian prices in a future blog)? Will Chinese investments in US real estate accelerate, now that the Chinese stock markets are shown to be so volatile, or might Chinese investors liquidate holdings to cover stock market debts, take advantage of lower Chinese stock market prices, or under pressure from the Chinese government?
Many analysts have touted the role of Asian money driving home prices in the three areas mentioned above. If the China stock market is in turmoil might the opposite be true now?
I focus on San Francisco as it’s been the focus of other reports and (of the three) it’s the only one with a CME housing contract (SFR). The Nov ’17 contract is bid 17.5% higher than the current Case Shiller index. Is that the right level, or can the case be made that San Fran real estate is a safe haven (for Chinese investors) and that money will continue to drive home prices higher?
My hope is that this debate finds its way to trading the SFR contracts.
Feel free to post ideas or PM me if you have an trading ax or idea at johnhdolan@homepricefutures.com.

2015 HPA: As derived from Feb ’15/Feb ’16 markets

This is the time of year when many research teams make their forecasts for home prices (or HPA, home price appreciation) for 2015. What weight should you give those forecasts, are they corroborated by others, and what do you do if you agree (or disagree) with them?

I would argue that the CME Case Shiller futures markets for Feb ’15 and Feb ’16 expiration should provide both a good sanity check as well as the best public platform for making a pure statement on home price appreciation for 2015. Recall that the Feb ’15 contract references the Case Shiller index for the period ending Dec. 2014, while the Feb ’16 contract settles on the value of the CS index for the period ending Dec. 2015. If you believe that contract prices reflect expectations for the index value at settlement, then you might opt to derive implied changes in index levels (or HPA) from the percent differences in contract prices.* (* There may be many other reasons for quotes and price differences)

The table to the right shows both the outright Feb ’15 and Feb ’16 markets for each of the 11 regions (to the left) as well as the calendar spread markets. The bid and offer on the calendar spread markets, as well as the difference between the mid-market levels (in yellow) are converted to implied percent changes further to the right.

Those percent changes are compared vs. changes in the CS index for the last 12 months.

Finally, the last column shows the width of the bid/ask spread in the Feb ’15/Feb ’16 calendar spread markets.

Net, the implied HPAs derived from calendar spread bids and offers tend to bracket those implied by mid-/mid-market levels. Those HPA range from 3.1% (BOS) to 4.6% (MIA).

Bids and offers on calendar spread implied HPA tend to be +/- 0.5-1.0% higher or lower than implied HPA from Mid-mid markets but with some (e.g. SFR) being much tighter, while others (e.g. CHI) tend to be wider.

Tighter calendar spreads help tighten outright markets (and vice-versa) so any help on narrowing these calendar spreads would be appreciated.

My attempt in posting this table is to prompt awareness of, discussion of, and (hopefully) trading in these spreads. (BTW both LAX and SFR Feb ’15/’16 calendar spreads have traded in the last few weeks). Feel free to ask me any questions about this blog, or any aspect of home price hedging at johnhdolan@homepricefutures.com

As Nov. expiration approaches

The last day of trading for the Nov 2013 contract is Monday. (Recall that the Case Shiller indices will be released on Tuesday and that the Nov 2013 contract will settle on those numbers.) With only a few days to go I thought that I’d tweak quotes and post a market status.

The attached table shows bid. ask, and mid-market levels for the 11 CME futures contracts (from earlier this morning). All bid-ask spreads are <= 2.0 points, although none is tighter than 1.4 points. In past expirations we’ve often seen one contract where value is being more hotly “debated” with a tighter bid/ask spread. Given that open interest for Nov. is 81 contracts (including 46 in CHI) there may be some traders looking to unwind (or roll forward) Nov positions. I’d expect some outright and short calendar spread trading over the next few days. The Nov /Feb calendar spread markets are wide at this point (not shown) probably due to the combination of changing seasonal factors (warm vs. cold states) and concerns about the underlying momentum in home prices. (Look for a blog on Nov /Feb spreads in the next few days.)

The Nov 2013 mid-market contract values are consistent with news headlines touting continued (but slowing) gains in all regional indices (at least those traded on the CME). The LAV, SDG and SFR will lead the year-over-year increases, while the Northeast areas of BOS, NYM and WDC will show as the laggards.

Finally, note that with the expiration of the Nov 2013 contract, the CME will introduce a new contract for Nov 2018. I would expect that most contracts roll out with 2-5% implied HPA gains over mid-2017 levels. With gains implied by such HPA, the forward level of CS indices will move even closer to full recovery versus 2006 “highs” in selected key regions. I would expect some push-back, increased interest in hedging as we get to “back to past high levels”.

InterCity Spread update: pushing closer

The narrowing in the bid/ask spread in longer-dated California markets (particularly LAX) has been primarily a function of traders offering lower. Those lower offers have also impacted intercity spread quotes, both by narrowing the “arb” level (simultaneous lift one offer in one contract while hitting the bid in another) and by giving IC traders some comfort to narrow their quotes. As a result IC spreads in some longer-dated markets are as tight as I’ve ever seen them.

The table to the right shows a sample of recent IC spreads between the HCI contract (CUS index) and three larger regional contracts. The two-point HCI_LAX X16 IC market of -36.6/-34.6 is the narrowest IC bid/ask spread I can recall on a longer contract in many months. While there are tight markets in both HCIX16 and LAXX16, this IC spread may be of interest to those looking to express a view on the relative value of these two contracts, without taking as much outright risk.

One other point to highlight on the HCI_LAXX16 quote is that if, purely as an example, the spread was traded at -36.6, and #’s such at 206 (for HCI) and 242.6 (for LAX) were used to settle the IC trade, then both components would be ~15.2% over spot level, or about a wash on relative forward performance. This toss-up is a very different state than the last two years when forward California markets have been trading at better implied performance than the CUS 10-city index. For these numbers to give, either home price appreciation will slow in LAX (relative to the CUS index) or other portions of the CUS index (e.g. NYM, BOS, WDC) might have to pick up.

Finally, note that the slowdown in LAX (relative to CUS) does not apply to SFR. The implied percent gains in the HCI_SFR_X16 IC spread are consistent with SFR continuing to outperform the balance of the 10-city index. What makes this curious to me is that some of the rating agencies have punished RMBS deals with San Fran concentrations. Yet, here, this market thinks SFR will do better than the rest of the 10-city index over the next four years. This would seem to open the door to some kind of hedge in RMBS deals to allow San Fran exposure, protect AAA investors, expand the “advance rate” on AAA’s, while taking advantage of the relative bullishness in SFR.

As always, the challenge is that most of these markets are one contract deep (w/ the exception of LAXX16 bid today) and drawing conclusions on such thin markets is iffy. That said, I think that the CME Case Shiller futures, and in particular the IC market, is a great template for having these discussions.

Please feel free to contact me if you have any questions about IC spreads, or care to offer your views. johnhdolan@homepricefutures.com

Basics: What If CUS Index composition weights change?

The weighting for Case Shiller composite indices (e.g. CUS 10-city, referenced in the CME contracts) may be adjusted 2- 3 years after the 2010 census, per the Case Shiller index methodology. I raise this notion to: 1) increase awareness, 2) minimize concern, and 3) invite those who better understand index calculations to weigh in. I have no idea if, or when, this might happen, but as it might have an impact on CUS values, I wanted to start a (more public) discussion.

As a test, I used the changes in population for loosely defined geographic regions to try and estimate what the new weights might look like and how those changes might impact CUS values. I made the simplistic leap of faith that population growth is correlated to housing stock, which I believe, will be the denominator for assigning weights by region. The analysis is not intended to be precise but to illustrate some key moving parts in how a change in weighting might impact (if at all) the CUS index.

The population gains are primarily in the West (DEN, LAV, LAX, SDG and SFR) and South (MIA) while the losses are in the North (BOS, CHI, NYM). The WDC region bucks the Northeast trend. Given my “What If” weights, the CUS index would be impacted in this analysis by -0.18.

The reason that an adjustment (using my “What If” weights) is so small is that weighting is taken away from NYM (which trades at a fairly close level to the CUS index) and redistributed to both the low priced index areas of LAV and DEN (which would pull down the CUS value) AND the high-priced areas of SDG and WDC.

(Note that any change in the allocation to SFR should have a small impact on spot CUS values as both indices have about the same value. However this (a change in redistribution to SFR) would not be neutral to longer-dated contracts where SFR contracts trades at a premium to CUS.)

Key to any estimation/conclusion is how future index weightings might vary from this simplistic analysis. Changes from/to the low index areas (DEN, LAV) to the high-priced index areas (LAX, WDC) might result in more pronounced changes to CUS.

Feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss this theme, or any other aspect of trading home price indices.

Pre-July Front Contract (Aug13)

I’m back from vacation and am pleased to see that many bid/ask spreads have tightened and some trades have occurred over the last week. Most of the trading seems to have been in the calendar spread markets focused on the Aug/Nov ’13 spreads. (I saw trades in DEN, SDG and WDC calendar spreads.)

I imagine that some of that trading is geared toward how sustainable the rally in home prices will be as the summer evolves. JPMorgan recently updated their view on housing and Citi weighed in with some interesting comments on whether inventory was getting better or worse (based on revisions). All (mortgage) eyes remain fixated on 10-year Treasuries as even slight changes in interest rates result in large percentage changes in monthly mortgage payments, at these rate levels.

With the July release of the Case Shiller indices only one week away, here’s an update of the front contract table.

As noted above Aug ’13 bid/ask spreads have compressed to range from 1.4 (LAV) to 4.6 points (SDG). (BTW- the combination of tighter Aug ’13 markets, combined with interest in the Aug/Nov calendar spreads has contributed to better Nov ’13 markets. More later.)

Mid-August markets are consistent with continued growth in home prices (accompanied by a seasonal tail wind). NYM lags with “only” a 4.2% increase over spot levels priced into the front contracts, while the mid-market for SFR is 8.2% over spot. On a year-on-year basis, the SFR and LAV contracts are pricing in gains of >24% while BOS, CHI, NYM and WDC are priced for single-digit percentage increases.

Only LAX and SDG have open interest of >= 5 contracts so trading could be quiet.

As always, feel free to contact me (johnhdolan@homepricefutures.com) if you have any trading ideas that you’d like to talk about or have touted.

Front Contracts

I introduced a new graph in the May review that I think will help anyone looking at prices across the front three expirations. I barely commented on the graph in the review. Now, with the benefit of more quotes since month-end, and some tweaking of the graph, I’d like to go over it in more detail.

The graph shows the bid/ask/mid quotes -expressed as a percent of the spot index – for the front three contracts (Aug ’13, Nov ’13, and Feb ’14) for each of the 11 Case Shiller contracts traded on the CME (ten regional contracts plus the CUS/HCI 10-city index). Aug ’13 is the front contract, the Nov. series is typically the most active, and the Feb ’14 contract will be settled on year-end Case Shiller index values, so anyone looking at market-implied index changes for 2013, should pay attention. I sorted the contracts into my predefined areas of “Cold” (BOS, NYM, WDC, CHI and DEN) and “Warm” (LAX, SDG, SFR, LAV and MIA) regions to illustrate how performance between these two higher-level areas differs.

Some notes:

All regions show sharp increases through Aug and Nov ’13. NYM represents the low while SFR has the highest forward prices. This mirrors the performance of these regional indices over the last year.
The bid for Feb ’14 CUS contracts is 7.8% above spot levels, and (not shown) +9.8% above Dec ’12 values. The Feb ’14 contract is thinly traded (even within the context of CME Futures), and the Feb ’13 prices were more “optimistic” last year during the summer than where CS index values ended 2012. That said, if the Feb ’14 contract prices are correct, research teams will have to raise their forecasts (as Citi has already done) for 2013.
Quotes for the Cold regions are generally lower than for those in the Warm regions. SDG and MIA are somewhat low, but on balance, forward prices in California (and LAV) far exceed those of the Cold regions, particularly has one moves into the Nov and Feb contracts.
Bid/ask spreads vary considerably across regions (with BOS and SFR having tighter spreads) in the Aug ’13 contract. In each of the last two settlements bid/ask spreads in several contracts compressed to <1.0 (<0.5%). Currently BOS (@ 1.8) and SFR (@1.6) are the best, with WDC (@ 6 points) the widest dollar spread, and DEN (@3.2.%) the widest on a percentage basis.
The Cold and Warm states seem to have different seasonal factors between the Nov and Feb contracts. Generally, the Cold states have lower prices for Feb than Nov (and that shows in calendar spreads) while the Warm states are close to neutral (between Nov and Feb)
The Feb ’14 bid/ask spreads are generally much wider than Nov ’13 bid/ask spreads. As these are the markets that reflect projected 2013 changes, they merit some attention (and need some help).
While the HCI/CUS contract has the highest open interest, CUS prices are the weighted average of two very different markets (the Cold and Warm regions). They may be the best trading market but it’s hard to generalize what a view on CUS means given that the underlying components are so different.
Similar analysis of all contracts (where there are two sided-markets) in longer-dated expirations (to be shown at a later date) shows: a) a continuation of the Warm/Cold divide, but b) overall reversion to 3.5-4% HPA across regions.

As with all observation on CME Case Shiller futures, there is limited depth to the market (and very few trades), so all conclusions should be compared to more fundamental research.

I’d be interested in any third-party reactions to this graph, or the general topic of the direction of forward prices. Please feel free to contact me (johnhdolan@homepricefutures.com) if you care to discuss.

May ’13 contracts – 3 weeks to go

With the May ’13 expiration in just three weeks, and a handful of recent K13 trades (LAV, MIA, NYM), I thought that it might make sense to focus on front-contract markets.

The following table shows the recent history of each of the 11 traded CME reference indices as well as recent bids, offers and mid-market levels. These mid-market levels are then compared to Feb ’13 and Mar ’12 index levels to show what index increases might be.

(Recall that the May 2013 futures settle on the March 2013 Case Shiller index which measures the period Jan-Mar 2013. This makes trading in the expiring contract different from other expirations as trading becomes an act/art(?)/ of anticipating how the already-known repeat-sales price data points will be assembled into the March 2013 index. Since the futures settlement price converges to the next CS index release, it can be strongly argued that the expiring contract prices should reflect expectations.)

Posted bid/ask spreads for the May ’13 contracts were all between 1.0 and 2.0 points, but as these have to be kept live throughout the day, it’s likely that larger amounts might be traded at inside posted levels.

Mid-market prices for the May contracts are slightly higher than the Feb indices indicating that negative seasonal factors are likely to be offset by growing buying interest.

The headlines for Wed. May 29th will highlight the year-on-year gains in SFR and LAV (each ~>19%) and contrast those against the lagging NYM and CHI markets.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this table or any aspect of trading home price derivatives.