Tag: spreads

Quotes on the S&P Case Shiller futures contracts were generally lower after Tuesday’s release of the May indices.  (Sorry for the delay but I was attending the Core Logic Real Estate symposium, where among other topics, the 300+ audience heard (twice!) about the need for the real estate market to hedge forward home prices.  CME futures were specifically suggested as a template.  I’m hoping for lots of questions from interested parties.  More on that in a future blog.).

My sense is that it wasn’t so much that index levels didn’t rise, but they rose less than had been implied by Aug ’15 contract prices.  (There were also slightly revisions to past month #’s that tempered SFR gains.)   In fact there were two sales (i.e. when a bid is  hit) in the SFR contract on Monday that proved to be correct.  (There were no trades on Tuesday).

The “one-day price move” line (3rd from the bottom) illustrates the decline.  Mid-market levels on the Nov ’15 contract fell in 9 of the 11 contracts, with BOS and LAV being the exceptions.  The regions that have exhibited strong index gains (e.g DEN, MIA, and SFR), and that had priced in further strong gains in futures prices, all slipped by more than two points, despite month-on-month index gains.    (My sense is that DEN and SFR both still have some of the lowest “months on inventory” ratios and that further noise in these regional indices should be expected.).

Bid/Ask spreads were unchanged for Nov ’15 (shown here), but slightly tighter in Q15 and much wider in X16 (both not shown here).  With ~one month to expiration, Aug ’15 (Q15) bid/ask spreads average 1.67 points which is tighter than recent experience (e.g. the bid/ask spreads for the May ’15 contracts averaged 2.67 points as of April 30) but about normal for past expirations.  We still have two days before month-end, so it’s possible spreads could be tighter still.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog or hedging home prices.

Thanks,

John

 

Wow!  In four years of market making I can’t recall seeing so many Case Shiller numbers reported outside the bid/ask range of the expiring contract.  In addition, while there have been occasions when the futures were too high or too low (versus CS #’s reported the next day) but never can I recall seeing such a mix of surprises to both the up- and down-side.

 For those not familiar with my analysis the table to the right shows the historical CS #’s, the Feb ’15 (G15) contract prices from the close yesterday, the difference between the G15 mid-market values and today’s CS #’s, the Nov ’15 prices from yesterday, and the change in the Nov ’15 market today.  (BTW – The historical CS #’s are what was available yesterday and prices are from around 3 PM)

The numbers in the section labeled “Actual Index” are highlighted in green to show where CS #s were above the offered side, and in red to show where the CS#s were below the bid side.  That is, in 9 of the 11 contracts, if someone had been able to calculate the December Case Shiller index by Monday 3 PM, they could have either hit a bid (in CHI, LAV and SDG contracts) or lifted an offer ( in HCI, DEN, LAX, NYM, SFR and WDC contracts) and made money.

While in some cases (e.g. SFR) it turns out that there were upward revisions that made it easier for the index to be above yesterday’s G15 offers, in other cases (e.g. WDC) there were downward revisions to last month’s CS #’s, but today’s numbers still were higher than the G15 offer.

Those that say that they can predict the CS regional index prices either have their work cut out for them, or a great opportunity.

Despite the surprises (equal to outliers), most CME prices were relatively stable today.  From the table you can see that the regions where the CS #’s were above the Feb ’15 contract prices (e.g. DEN and SFR) Nov ’15 contract prices tended to increase.  (Again for new readers I tend to focus on the Nov expiration cycle as those markets tend to have the tightest bid/ask spreads, largest open interest (OI), and longest dated contracts).  Similarly, where the index was a “surprise” to the downside, Nov ’15 markets (e.g. LAV an SDG) moved lower.

The table to the right shows changes in bids and offers since yesterday.  On balance, bids and offers moved higher (with the exception of LAV and SDG).  Bid/ask spreads widened from yesterday (but are still barely tighter versus Jan 30) but most of that was concentrated in the Feb ’16 contract.  (Many of the Feb ’16 prices before today were a function of calendar spreads based on the Feb ’15 contract.  With the expiration of the Feb ’15 contract those calendar spreads lapsed.  I need to dive back in to tweak the Feb ’16 bid/ask spreads going forward).

I am aware of four trades for today (1 in HCIK15 and 3 in SFR contracts).

With the expiration of the Feb ’15 contract the CME opened trading in the Aug ’16 (Q16) contract.  I expect most quotes in q16 to be a function of calendar spreads (e.g. Q16 v. X16) for the near future.

In addition, with the expiration of the Feb ’15 contract, I’ve posted a “starter set” of K15/K16 calendar spreads so that traders can debate one-year forward HPA.

Friday will be month-end so I hope to get some help bringing in spreads further and filling out prices to contracts without quotes.

Please let me know if you like to discuss a trade or have an axe you’d like touted.  You can reach me at johnhdolan@homepricefutures.com

 

It’s been a quiet (silent) month in the CME  Case Shiller futures with no trades.  Bid/Ask spreads continue to grind in, and edge higher  (in search of a level that will prompt a trade?) across almost all expirations and regions.  (See table to the right. A table detailing bid/ask spreads and changes by contract is included in the Reports section or one can access here. )

BOS has tightened the most as I’ve narrowed bid/ask spreads in an effort to create some open interest in BOS.  (Every other region has at least 1 OI, and every region has at least 1 OI in the Nov ’15 expiration).  I’d be VERY open to getting a trade done in BOSX15.

Feb ’16 contracts have tightened on both tighter G15 markets (which feed into G16 on one-year calendar spreads) as well as some narrowing of Nov ’15/Feb ’16 spreads.

Nov ’17 spreads have benefited from some intercity spread orders (e.g. MIA).

The expiring Feb ’15 (G15) contracts has spreads that are all <= to 1.0.  Anyone looking to test their Case Shiller forecasting model is encouraged to bid/offer/trade until trading stops at 3 PM (EST) on Monday.  I’d also be happy to post projections after the close.  We can then compare results on Tuesday morning after Case Shiller numbers for Dec. 2014 are released.

The CUS and LAX contracts tend to have the tightest bid/ask spreads.  (The tightest two spreads by expiration are highlighted in green.  The widest two are in red.) DEN, MIA and NYM have some expirations (beyond the Feb ’15 cycle) that make it into the top two.  LAV and SDG lead in contracts with the widest bid/ask spreads.  Any help there would be appreciated.  In addition, I’m open to any intercity spread inquiries referencing these contracts that might help narrow spreads.

Open interest for Feb is only 8 contracts (and with only a total of 15 across Feb, May and Aug) so there’s plenty of time to build up new interest.

My sense is that bid/ask spreads have been tightening in a vacuum of activity but also that that narrowing will address concerns about bid/ask spreads having been too wide.

I’d note that the CUSX16 contract has been quoted with < 1.0 bid/ask spread for almost 90 days now.  Anyone looking to express a macro view on home prices would be encouraged to participate there.

As always, feel free to PM me with any questions, or “axes” that you might want touted.  You can reach me at johnhdolan@homepricefutures.com

 

There were 12 trades yesterday.  All took place in X14 contracts across six regions (CUS, CHI, LAX, SDG, SFR and WDC).  As is typical for the limited trading in the CME housing contracts, the trades took place a) on a date when the Case Shiller indices were updated, and b) at a time when there was a change in sentiment over price levels.  For example, the biggest trading volume month in the last five years was May 2012 when 83 contracts traded.  That month was the turn from any lingering bearish sentiment to two years of strong price gains.

Yesterday, the Nov ’14 contracts saw good volume (across multiple contracts) and the biggest price move in the last two years.  So, are we at another inflection point, where possibly this time, the bulls are capitulating?

Here’s two illustrations to get the debate going.

The first is a version of yesterday’s table updated to include a review of the Nov ’14 market price moves from the days before the CS #’s were release to late yesterday.   The bottom line shows the price changes that took place.   The mid-market levels were lower on 9 of the 11 contracts (with the only two exceptions- LAV and NYM – being regions where the Aug CS index #’s were higher than Aug 2014 contract mid-market levels.)

For the remaining nine contracts the decline in Nov ’14 mids was a multiple of the “surprise” from yesterday’s indices.  This seems to make intuitive sense as a one-month surprise of, for example, 1.0 point, might infer a change going forward over the next 3 months, resulting in magnified price moves.  (While the Nov ’14 contracts bore the burnt of price declines, back contracts did not move as much.  We’ll see what happens today).

Second, here’s a graph of the Nov ’14 closes over the last year.   Futures prices jumped higher over a year ago, and index levels have been slowly catching up, month by month.  In fact, while all of the press has focused on rising home price index levels, the graphs shows that futures prices have been relatively stable (at the higher “predicted” levels) – that is, until yesterday.

 

Third, while futures prices took a big hit yesterday, prices for the Nov ’14 contract are still higher than spot level reflecting seasonal factors (of 1-2% on the CUS contract).  (Recall that the headline CS indices are not seasonally adjusted).  the CME contracts are consistent with index gains of ~1 to 3% over the next 3 months.  To put that in perspective I added the gains over the last 1 and 3 months below the graph.  Both LAV and NYM (yesterday’s two strongest contracts) are the only two that seem to be pricing in gains near the amount recognized over the last 3 months.

Thus, it seems that we will still be getting “home prices rise” headlines for the next few months.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, CME activity, or if you have any “axes” that you’d like touted.

Again, if you appreciate this work, please consider donating to my upcoming (Sept 20-24) charity bike ride.

http://bike.climateride.org/index.cfm?fuseaction=donorDrive.participant&participantID=3124