trading – HomePriceFutures.com

Diagram to reflect changes in forward SFR markets

The graph below may be the best way of illustrating several points that are key to understanding home price futures, as well as the current debate over home price expectations:

All home price indices (including Case Shiller) measure events that have taken place a couple of months ago. Since traders often incorporate changing expectations, futures prices may go down (or up) while index values are rising (or falling). As the graph shows, the SFR (San Fran) index slowly increased in all but one month since Nov 2017, while the SFR X20 (Nov 2020 expiration) and X22 (Nov 2022) contracts rallied until about Sept 1, and then collapsed. As such, there may be useful, more-timely information in such forward-looking markets, that is not captured in published indices.
Futures prices are public, are updated in real-time, and are posted by traders willing to financially back their views. As such, they differ from periodic forecasts. Both may be useful (and more so, if markets are deep and liquid). The press and analysts, should pay more attention to futures prices.
Futures prices have to converge to index levels as the contracts settle on some future (albeit unknown) index value. The graph of the SFRX18 contract and the CS SFR illustrate this convergence. Recall that the data for the Nov ’18 settlement includes home price activity from July, August and September. As such, (particularly on such shorter-expiration contracts) expectations of future index values should dominate pricing of futures contracts, as subsequent events (e.g. stock market falling 200 points in October, can’t impact past index calculations).
At times, longer-expiration contracts may be more volatile than suggested by standard risk metrics. (See August-Sept 2018 section in graph.) This has implications for pricing longer-dated options.
The difference between curves may be consistent with views on forward HPI. The ~20 point difference between the X18 and X22 contracts in mid-year may have been consistent with ~3% HPA assumptions over the next four years. By contrast, today’s X20/X22 prices have fallen due to changes in views that may be more consistent with <1% HPA. A key debate in these markets is whether the forward premium collapse is due to more negative forward sentiment, or just the old “more sellers than buyers” adage. (BTW -The curves may go inverted -i.e. with longer-dated contracts trading at a discount to either spot or front contracts – as was the case in 2008. Such pricing would be consistent with negative HPA.)
Hedging works. Note that someone in May -July, looking to lock in market-implied HPA of ~3%, could have hedged spot SFR exposure with longer-dated SFR contracts, and made money on both sides as longs rose in value, while shorts fell, as HPA expectations collapsed.

Now I can’t make the above statements without adding some qualifiers and observations, that also speak to understanding trading these futures, and how one might interpret prices.

These markets are thinly traded. In the three contracts shown there may be have been weeks without a trade. “Closes” can change without a trade as they are (at CME) a function of last trade, a lower offer, or a better bid.
Traders may buy or sell (or post bids and offers) for a variety of reason beyond their expectations of future index values. For example, traders may be looking to hedge real estate (or other) exposures, or sense that sentiment will grow more negative. Given the lack of depth, the arrival of larger new contract buyers or sellers, may put upward/downward pressure on prices, unrelated to expectations.
I tend to show 1×1 “actionable” quotes (one bid versus one ask) to form graphs, narrow bid/ask debate. I may be aware of more interest, at, or inside bid and offer, but may not show (or keep live all day/week). As such: 1) please refrain from market orders that are bigger than amount shown, and 2) feel free to contact me if you’d like to share ideas.
The CME Case Shiller futures contracts seem to react most notably to infrequent events -e.g. monthly updates to index values, announcements on home sales, S&P 500 index changes of 50+ points. More trading tends to take place on such days, but otherwise prices tend to be quiet and trend/drift in-between with limited trades.
Most trading seems to take place in the first 30 minutes and last hour of the trading day (the former often coinciding with economic updates). A trader looking to get something done should appreciate (IMHO) that there will be more eyeballs on the contracts at those hours.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or would care to discuss any aspect of hedging home prices.

Thanks, John

CME Markets post this morning’s Case Shiller #’s

Quotes on the CME Case Shiller home price index futures are generally lower by about 1/2 point per contract, after this morning’s release of the monthly Case Shiller numbers. The table below shows prices for the 11 Nov. 2019 contracts (X19) comparing yesterday versus today. The LAV and WDC contracts are higher (based on mid-markets) but all nine other contracts are lower. Home price indices on the coasts (BOS/NYM and LAX/SDG/SFR) faired worse than those inland. (This despite substantial upward revisions in last month’s NYM index.)

Forward curves continue to come under pressure. While the S&P press release led with the headline “Annual gains fall below 6% for the first time in 12 months”, year-on-year price differences on several contracts are consistent with HPA dropping to <2% by 2020.

There have been no trades yet today, but 22 contracts have traded this month, the largest monthly total since Jan. 2017. (My sense is that volume picks up when markets change direction. The biggest volumes were in the first months of the Financial Crises and in Spring 2012 when home price bottomed.)

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

Thanks, John

CME Case Shiller price moves during stock market selloff

Quotes on the CME Case Shiller home price index futures have been moving lower since month-end, and most notably somewhat in sync with the selloff in the stock market over the last two days. The price moves for the first two weeks of October have been larger than any monthly move in recent memory (hence this post).

The tables below show changes to individual the HCI (10-city index) contracts, as well as summaries for the price moves across regions and expirations. Note that the last two series don’t tie out as the far right column only tallies price changes on contracts where there are two-sided markets. A set of the changes for all 11 regions is included in the Reports section, or you can access here.

At a high level, prices are lower across all regions, and for all expirations (except Nov ’18, which measures activity through Sept 30), with the biggest declines in longer-dated contracts. Such price moves are consistent with declining HPA (as early as the K19 contracts). Some longer-dated calendar spreads are now bid flat (i.e. the next contract would be bid at the level of the earlier one) and I could see selling interest taking X22 contracts negative.

Price declines have been biggest in the California contracts (LAX, SDG and SFR). Bid/ask spreads have not widened as much as in the past, as third parties have been posting (a limited number) of bids and offers. Third party activity remains focused on the LAV, LAX and SFR contracts.

Other than a series of trades in the (soon-to-be) expiring SFRX18 contract, there have been no trades, but several tight selected markets.

With the stock market selloff, rise in VIX by >50%, and the price moves here, my offering levels on puts has jumped (as higher volatility, lower forward prices, and absence of third-party buyers demand additional caution.)

As with any market disturbance the current re-pricing may present some interesting trading opportunities. Please feel free to contact me (johnhdolan@homepricefutures.com) if you’d like to discuss any trading ideas.

Thanks,

John

September Recap of CME Case Shiller futures

I’ve posted a recap of (the very limited) activity in the CME Case Shiller home price index futures for September. You can find the recap in the Reports section, or access here.

(I’ve also updated life-to-date volume and open interest tables. Both are in the Reports section.)

There was very limited trading in September (partially as I was traveling for two weeks) but prices moved lower -particularly in longer-dated expirations – across all regions (except LAV). For now, as I note below in the highlights, interest from third parties is concentrated in: front contracts, SFR region, and puts. As such, I’m going to start this month to shift my focus from posting continual two-sided prices on all (121) contracts to more concentrated focus on those three areas. I’ll still try to recap all prices in month-end reports. Of course, anyone can continue to post prices in any contract but best to contact me if you’d like a response to your inquiry.

Month-end highlights include:

–There were 2 futures contracts traded in September –both in SFRX18.

–There were no options trades (but multiple inquiries focused on 9-18 month, slightly out-of-the money strikes.)

–Despite low volume, there is interest from third-parties, primarily in front contracts, across the SFR expirations, and puts.

–Bids and offers were lower across all regions (except LAV and MIA). Prices for LAX and WDC were down the most.

–Bids and offers were lower across expirations with biggest declines in contracts beyond Nov 2020.

–OI on futures fell from 48 to 47.

–OI has become even more concentrated in Nov expiration cycle with all but 2 of 48 OI in Nov contracts.

-Paris contracts have not begun to trade. Index representatives will be in the NYC area in mid-November should anyone want to hear more.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price index exposures.

Thanks, John

CME reaction to post Tues Sept 25 CS#’s

Quotes on the CME Case Shiller home price index futures are mixed, and a hair lower, after this morning’s release of Case Shiller numbers. As illustrated in the table below, prices on the Nov ’19 (X19) BOS and LAX contracts are lower by one point, while the LAV and SFR contracts are higher. The HCI (10-city contract) is lower by 0.5 reflecting slight declines across the ten regions. Bid/ask spreads are almost back to pre-CS#’s.

While there have been no trades yet today, (with the turn in HPA) I continue to receive inquires from people looking to buy puts. (Most inquires are for 1-2 years for slightly out-of-the money strikes). In my Sept 21 blog I highlighted that options are now easier (for me) to trade across all ten regional contracts. I have a limited budget for put writing, so anyone looking to sell puts should have some pricing power.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any other aspect of hedging home price indices.

Thanks, John

Recap of August activity in CME Case Shiller futures and options

I’ve posted a recap of activity in the CME S&P Case Shiller home price index contracts for August. You can find it in the Reports section or link here. The report include graphs, tables, and charts on the 121 home price index contracts (11 regions * 11 expirations). Readers may view forward curves to observe prices that: 1) are consistent with positive, but declining HPA, and 2) which regions are priced for bigger gains than others.

The summary findings in the report are:

–There were 8 futures contracts traded in August in 3 regions (DEN, NYM and SFR) across 3 expirations, in 3 trades. One trade (5 SFRX22) was negotiated off-line. Unusually there was only one lot traded the days just before, or after, the release of Case Shiller #’s.

–There were no options trades (and haven’t been any in almost a year). I’d like to be responsive to any inquires –puts, calls/ in, out of the money/paired trades -to jump-start trading in options.

–Despite low volume, there is interest from third-parties, primarily in front contracts and across the SFR expirations. The SFRX22 contract was quoted much of the month with <3 point bid/ask spread.

–While bids and offers were generally lower across many regions for August, BOS, LAV, MIA and WDC all had higher bids. (Note that 3 of the 4 have no OI so I am trying to “stir the pot”).

–OI on futures rose from 44 to 48. (OI dropped below 100 in April 2014 and I’ve been trying to claw back to that level).

–OI has become even more concentrated in Nov expiration cycle with all but 2 of 48 OI in Nov contracts.

–Growing interest in “Fractional Interests” and “shared appreciation strategies” leading to more detailed conversation of home price expectations. I’m planning a mid-Sept blog to detail developments in this area. Open to contributions.

As a general theme, there seems to be growing sentiment that HPA gains are slowing (possibly increasing the need for hedging), bid/ask spreads have been contracting, and I’m eager to facilitate retail-sized trades. Net, a good landscape for growing volume.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions about this blog, or any aspect of hedging home price indices.

Thanks, John

Recap of activity in CME Case Shiller futures for July

I just posted an 18-page recap of (the very limited) activity in the CME Case Shiller futures for the month of July. There are pages with tables of recent outright prices, and price changes, calendar and intercity spread quotes, indicative option prices, and volume and open interest (OI) figures. The recap can be found in the Reports section (along with some background material and historical reports) or can be linked here.

The key points from July report include:

–There were 5 futures contracts traded in July in 2 regions (DEN and SFR) across 3 expirations. (4 of the 5 trades were in SFR contracts). Volume has been very low for the last 12 months, but with more commentary on social media about a bubble, and ever-tighter bid/ask spreads, I remain optimistic that trading volume will increase dramatically.

– There were no options trades. The recap has a page showing where I’d be open to buying/selling puts on one-year forward, at-the money strikes (but recall that any options -both puts and calls -can be arranged for any region, for any expiration, on any 5-point interval). I’d be happy to respond to any option inquiry and/or to tout any “trading axe” that a reader wants to share.

–Despite low volume, activity (third parties bidding and offering) picked up, especially in SFR. The SFRX22 contract had at least 3 parties bidding and offering, and was quoted much of the month with <3 point bid/ask spread.

–For July, bids and offers were higher across many regions (except DEN, NYM, and SDG).

–There were 2-sided quotes in all 121 contracts, for most of July. While most quotes are 1×1 (one lot bid vs one lot offered), I’m open to facilitating retail-sized inquiries (up to 10 lots) in any contract. (A benefit of two-side trades is the resulting graphs showing YOY implied price changes). I’m preparing a blog for later this week detailing observations on forward implied YOY price gains/HPA, with a focus on opportunities in calendar spreads.

–Bid/ask spreads tightened slightly across all expirations. Spreads on the front contract (Aug ’18) are just over 1.0 point (about normal with one month to run), while bid/ask spreads on the Nov ’18 contract (which has been my benchmark contract for the last year) are tight at 2.0 points. The CUS, DEN, and SFR contracts have the tightest bid/ask by region due to recent trades and interest from other traders. By contrast, LAX, SDG and WDC (all regions with low OI) have the widest bid/ask spreads.

–OI on futures rose from 39 to 44. There are three regions (BOS, MIA and WDC with no OI. I’d be eager to accommodate any trade in those regions.)

–Home price index futures for Paris are still on schedule to be rolled out this fall. Key to the Paris contracts is much more narrowly defined geographic reference region. See tab “Paris Futures” for more details.

–I’ve received inquiries on hedging Seattle risk, which since not listed on the CME will require an OTC trade. Seattle presents an interesting trading opportunity as it’s had some of the highest home price gains, but some worry about a bubble. I’m looking for OTC counterparties for either forward or option OTC trades.

–Additionally, with so much interest in SFR, I’d like to hear from any looking to engage in an SFR options trade (put/call –either side.

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, or any aspect of hedging home price index risk.

Thanks, John

Futures can also be used by buyers to hedge -San Fran story

An excellent piece of research by Paragon RE on the San Francisco housing market and a tweet by one of my favorite journalists (Mike Rosenberg at the Seattle Times -see tweet here ) prompted me to air the idea of using the SFR (San Francisco area) Case Shiller home price futures as a potential hedge against runaway home prices in San Francisco, for those on the sidelines watching 10% year-on-year gains.

To recap, futures allow a user to lock in a price (long or short) on a contract that will settle on the Case Shiller SFR index value at some point in the future. While there has been near no volume, there have been a few trades over the last few weeks in the longest-dated SFR contract (the X22 contract that expires in Nov 2022). Today, that market was quoted 287.0/290.0, and the spot index for the Case Shiller SFR index is 264.29. (Contract notional values are $250* point, so ~ $72,000/contract at 288.) Such pricing may be informative -if only to viewers/not traders -as the contracts “cash settle” on the SFR index value in Nov 2022. That is, purely as an illustration, if someone bought a contract at 290, and the index settled in (Nov 2022) at 300 (about 13.3% gain over 4+ years) the buyer would have gained $2,500/contract (before any fees). If index levels were unchanged (i.e. at 264.29) at expiration, a seller at 287 would get about $5,750. (Note that there may be many reasons why people buy/sell and contract prices might vary substantially prior to settlement- beyond even these examples, but eventually -as contract expiration approaches -they must converge.)

I share the illustration not to encourage speculation, but to note to viewers, that the quotes are not merely opinions, or forecasts based on past history, but levels were users are willing to back up their exposure with money. While SFR prices have been screaming higher, these CME prices are consistent with continued home price gains, but at a slowing rate.

Futures (despite some negative press) may be useful tools for investors to consider if have more or less exposure to the commodity (in this case San Francisco home prices) than they care. While much as been written about homeowners looking for ideas to protect against a decline in home prices, those looking to buy homes in the future might also consider looking at futures if they want to add to their San Francisco exposure today.

Bids on the SFRX22 (Nov 2022 expiration) contract are consistent with gains of 8.6% (cumulative over the next 4+ years) while the offer is consistent with gains of 9.7%. Someone expecting, or fearful of, or negatively exposed to, 6-10% gains in home prices across San Francisco over the next few years (so 25-40% gains over 4+ years), might consider learning more about these futures. As an example, someone in Dec 2016 looking to buy in San Fran in Nov 2018, could’ve bought SFRX18 (Nov 2018 expiration) contracts at 241.2. The gains from a purchase of those contracts (which today were bid 270.6) would have offset a portion of higher prices they now face. A future buyer of a home in San Francisco, might be able to reduce some of the risk of prices running up 10+% for the next few years, with prudent hedging.

Now there are number of qualifiers (that include more than these) that this is now financial advice, that you should talk to your own broker about any decisions involving futures, that the markets are very thinly traded (so don’t use market orders), that markets may be volatile, and/or not even quoted in the future. That said, anyone looking to learn more should feel free to review the material in the Reports section on this website, or contact me (johnhdolan@homepricefutures.com) if they have any questions on these products, or if they’re interested in trading.

Thanks, John

Recap of June CME Case Shiller Futures -June 2018

A recap of activity in the CME Case Shiller home price index futures has been posted to the Reports section. You can click here to access. The recap includes end-of-month prices, and price changes for the last month, tables on volume, open interest, intercity spread and calendar spread markets, as well as suggested one-year put option quotes.

Additionally, a few new pages have been added to the Reports section to include: Volume in Case Shiller futures since 2006, Open Interest since 2006, and graphs linking historical Case Shiller data with contract prices, for each of the 11 regions. In addition, the mid-June regional review had suggested option pricing for multiple strikes and expirations by region.

Here are the key point from the recap:

–There were 15 futures contracts traded in June in 3 regions (DEN, LAV, and SFR) across 5 expirations. There were no options trades.

–Activity picked up with especially in SFR with 9 trades and the tightest bid/ask spreads. The SFRX22 contract was quoted much of the month with <3 point bid/ask spread.

–For June, bids and offers were higher across many regions (except NYM, which fell ~2 points). Much of the move took place after CS #’s were released on June 26th.

–For the first time in a few years, there were 2-sided quotes in all 121 contracts.

–Bid/ask spreads widened slightly across all expirations.

–Longer-dated contract bids rose, raising implied HPAs, albeit from still very low prior levels.

–OI on futures rose to 39. There are three regions (BOS, MIA and WDC with no OI.)

–Home price index futures contract for Paris to be rolled out this fall.

–I’ve received inquiries on hedging Seattle risk. Looking for OTC counterparties.

–Added to Reports website section – Vol/OI since 2006, price graphs on all contracts

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this recap, or any aspect of hedging home price index risk.

Thanks, John

CME Markets post today’s Case Shiller #’s

Quotes on the CME Case Shiller home price futures contracts were generally higher after this morning’s release of the Case Shiller numbers for April. The table below highlights prices from near the close yesterday versus early this morning. There are three key highlights;

Average mid-market prices rose by 0.4 for the Nov ’18 contracts. (see right side of table). Across the 121 contracts prices rose, on average, by about 1.0 point with bigger gains concentrated in longer-dated expirations.
While prices are higher this morning, there are outliers -most notably NYM, which is down more than 2.0 points, and LAV which is up more than 2.0 points. (Note that there were 3 LAV trades late yesterday with offers lifted, that may have contributed to higher prices.)
Bid/ask spreads are wider on the day (see lower right). This is typical of the first few hours post the release of Case Shiller #’s. Look for bid/ask spreads to contract as other users check markets, and as month-end nears.

Note that there have been 14 trades this month. Activity has been concentrated in LAV and SFR regions with 3 and 9 trades in each region. Unlike past months, activity has been spread across the expirations with trades in both the Aug ’18 contracts (2) as well as the longest Nov ’22 contracts (3).

Please feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions on this blog, hedging of home price indices in general, or have any trade ideas that you’d like to discuss.

Thanks, John