Skip to comments.New way to bet on real estate
Posted on 03/23/2006 10:47:50 PM PST by Attention Surplus Disorder
New way to bet on real estate
New financial instruments are being launched to let you wager on the direction of home prices in major cities.
By Les Christie, CNNMoney.com staff writer March 22, 2006: 12:00 PM EST NEW YORK (CNNMoney.com) - There's finally going to be a viable way to cash in on the housing price boom -- or to guard against its decline -- without going through the messy business of actually buying and selling properties.
On Tuesday, the Chicago Mercantile Exchange and Tradition Financial Services, together with Fiserv Case Shiller Weiss and Standard & Poor's, announced the launch of S&P CME Housing Futures and Options. These derivatives will enable investors to take a position on the direction of home prices either for the nation as a whole or for 10 major cities to start, including New York, Los Angeles and Chicago.
Of the three major asset classes, the bond, the stock and the housing markets, only the housing market, which represents some $20 trillion in assets, cannot be speculated on easily, said Robert Shiller, the Yale economist and author of "Irrational Exuberance," the 2000 book that foresaw the bursting of the tech-stock bubble. [snip]
The S&P CME Housing Futures and Options will be based on the data accumulated in these indexes, so accuracy is crucial for building trust among potential investors. Who will use them? Shiller sees these derivatives mostly as tools that large, institutional investors can use to reduce risks. Mortgage bankers, for example, could hedge against falling real estate markets that would increase their exposure to delinquencies and foreclosures. But John Labuszewski, of the CME, says, "Although the main customers will be institutional, there is a surprising amount of interest on the part of retail consumers." So how would an ordinary consumer employ these tools?
(Excerpt) Read more at money.cnn.com ...
Did you mean to say: will your mortgage lender force you to "Hedge" against price declines in your market?
If you were concerned about a price drop in your own house; you would short these futures, appropriate for your area, and such a "bet" would increase in value if housing in your area declined in price. The decline in one instrument would be offset by the rise in the other, as your short bet would incr. in value as housing fell. Taken together, and put on in the proper proportions, the combination of the two items would maintain a constant value. A hedge, for sure, as you said. You wouldn't actually be shorting "your own house", of course, but a proxy index. I was being a little flippant, as I am wont to be.
Suppose, for example, that you really really liked living in your house, but were strongly convinced it would decline in value. You could go more short than long, very much like overinsuring in the intended effect. These proposed futures would make such an exercise perfectly feasible and legal [which it currently is not!] If you were convinced your $500K home would fall in value to $400K, you could short double the number of futures contracts req'd to hedge a constant value in your home. Home falls to $400K, you cover half your short, pocket $100K, and the combination of home + short futures contract would still maintain a constant $500K value. Kewl?
But seriously...every short position must eventually be liquidated, thus purhased so is essentially bullish.
Here is your chance to make money, if you are inclined to put up.
I guess people with high risk aversion could get the cash from a home equity loan.
That is a very big if.
You've obviously never traded futures.
Sometimes the market makers, knowing better than the rest of us of how many shorts are out there at what prices, will bid the price up just to clean out the overhang of shorts. What fun!
Without going into a lot of technical details, just please consider a futures market in general. Arbitrarily, take wheat or Eurodollars.
Why are these markets successful? Because there exist both ''natural'' longs and ''natural'' shorts in these markets. The wheat grower is a natural short, because (if he's a brain in his head) he'll use the markets to lock in a price for his crop. The miller and the bread baker will use the markets to lock in their cost of input product. The specs and the funds grease the wheels (insure liquidity) for such markets.
The principal problem with housing/real estate index futures is that there is only one natural group of players, in theory: those who own homes in the index-covered areas. These are natural shorts.
Who are the natural longs? Damned if I know. Certainly not builders, who wouldn't fork over a dime to develop some land unless the numbers had already crunched correctly beforehand. Certainly not bankers or mortgage lenders, who don't give a warm damn about housing/real estate per se, only about the spreads that can be earned by lending in this area, and in ANY are more likely to use such markets on the short side to limit their exposure just in case housing/real estate should undergo a bit of slump at some point.
There are **no** ''natural'' longs in these markets, which means directly that, unless there comes to be a huge spec interest on the long side, these markets are absolutely and utterly doomed to fail.
I stand by every word of this post, and will gladly wager anyone here a cold beer against a $50 bill that, absent rampant spec by the funds, these markets don't exist for 3 years without MAJOR contract rewriting...and probably not even then.
''...and in ANY case ...''
Sorry, jenny, but that's a straw man argument -- the only people who ever get squeezed are pure specs. Nothing wrong with being a spec (hell's bells, I am one), but the problems with these new indices haven't anything to do with specs, or squeezes, or asymmetry.
The principal problem is, purely and simply, that one side of these markets is going to go begging, absent huge spec long interest.
Fearless forecast: these markets will suffer the same fate as the old Tom Turkey futures (oh, you don't remember that mkt? Died in 1974.), and for the same reason: every turkey grower in the nation tried to use that mkt to hedge their production, but virtually NOBODY wanted the long side.
Gobble, gobble, and good-bye. Same deal here, although it will take a little longer to play out because the real estate mkt is so vast.
I'm not going anywhere. I'll be here to say, ''See? What did I say?'' in a year or two.
BTW, I'm not a croaker, not anti-futures at all. Futures markets (our oil-conspiracy crowd here notwithstanding) serve a vital purpose. However, that said, no futures market EVER has succeeded unless it serves/has served the needs of BOTH the producers and the users.
To paraphrase Clint Eastwood in ''The Enforcer'' -- these markets ain't makin' it.
In these new markets under discussion, though, my understanding is that they're settled in cash, should one either hold a long or short position into expiration. Not surprising at all. Every index mkt, from S&P to Russells to DJ to Nikkei to weather to XAU, and not a few product futures mkts (lean hogs come to mind immediately), is settled in cash.
Talk about counter-productive, sheesh! The lender needs to move money. The more conditions on the loan, the less money is moved.
There just must be a ''DUH!'' in here, someplace.
Thanks for the miniprimer on futures. I understand options but not so much about futures.
Could you explain the difference between writing (selling) or buying options and selling or buying futures?
For example, to hedge myself against the downside of an equity I would write a call or buy a put.
In the futures market, would I purchase a contract to protect my downside?
Using your analogy of the wheat grower, you say they are the natural short for futures. Does that mean they sell or purchase a contract?
From the perspective of cash direction in equity options, if I write a call, the cash comes to me with the call contract. If I buy a put, the cash flows from me to the put writer. How does cash flow for future contracts? TIA.
Wow!!! This is cool! Now instead of selling, cashing out, and then moving into a trailer, you can just stay put and go short at the top of the bubble.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.