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 ...
Shouldn't it be self-correcting? Suppose it starts out like you say: more investors want short positions than long. Wouldn't that drive down the price to the point where it become a good deal to investors who would otherwise have bought REITs?
(Disclaimer: I know very little about the specifics of options or futures trading. I'm coming at this from basic economic theory. Feel free to tell me I have no idea what I'm talking about).
My understanding is that these things will only work in a certain trading range, otherwise the contracts would not make sense.
Basic economic analogy - If I can make a widget for $10 and the market for widgets drops so I can only sell it for $8, I will sell at a loss if I must, but will not make any more.
SAJ had a detailed explanation in post #13. Thoughts, SAJ?
Wouldn't touch their shares with a sterilised barge pole.
The mortgage industry pretty much has to find a new game to play; sub-prime home equity lending has to be nearly tapped out. This is the standard cycle in banking -- everyone piles into what is perceived as an excellent profit opportunity, then the field gets too crowded, then lending standards just relax to the point of idiocy, then somebody or somebodies overextend and ultimately collapse.
Then, they run to the taxpayer for a bailout. Wriston and the boys got clipped, hugely, on sovereign loans in the 1970s, guess who bailed their asses out? I had a bit of fun at his /their expense in chapter 2 of my recent book.
Must disagree with your assessment of this new r.e. futures mkt regarding homeowners, sorry. If a homeowner uses this mkt properly, it will indeed be an excellent hedge, and will have no effect on his/her debt levels if the r.e. mkt heads south. Effectively, what will happen to a hedged position in a falling r.e. mkt is that some amount of home equity will be transformed into 60% long-term cap gain, 40% short-term, per section 1256 of the IRC.
So, the hedge isn't perfect by a long chalk, unless the homeowner here has some amount of tax-loss carryforward.
But, the hedge is a damned sight better than nothing at all.
Many thanks, RB.
TTYL
As regards this market being somehow rangebound by rule, I shouldn't think so. It will only be ''rangebound'' in the sense that there are ''price'' levels of the index, both higher and lower, that will be effectively impossible to reach in the real world. Zero, for one.
BTW, if you're a widget manufacturer punching out widgets at $10, then -- before any collapse -- presumably you've been able to sell them for $11, else you're already out of business, right? What you should do in terms of widget futures is to pre-sell your forward production by selling for future delivery. Then, you won't have to fret for a time about the mkt going to $8.
Bad luck, of course, if there doesn't happen to be a widget futures mkt (g!).
Sorry, I was responding to ThinkDifferent's post #41 - I should have included it when I pinged you. Essentially, his question was regarding who would want a long position, as Econ 101 would indicate that the price should drop until it finds an equilibrium point. I attempted an analogy based on your previous post (IIRC, about the turkey future failure).
The only intuitively appealing long is if one is of a mind to spec this mkt, but you can't make bricks w/o straw. The specs will come in only if there's sufficient open interest, which will occur only when the specs come in.
Curious mkt, in some sense, in that both the industry (banking/mortgages) and the consumer would appear to be candidates for the same side of the mkt. Don't know if I can name another mkt quite like that.
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. ...
I've been mulling this over all day, and when I think of the stock market, I can't figure out what are the "natural" longs & shorts by your definition. (Which I read as: Anyone except speculators.) A long position in a dividend-paying stock is an investment in future cash flow of course, but aside from that what are the reasons to go long or short on a stock besides speculation, when you come down to it?
Hedging a long position is better done thru buying puts, isn't it? You can go long one stock & short another, but that doesn't strike me as being pervasive enough to offset the "natural longs".
The concept of ''natural'' longs and shorts applies to futures mkts, not equity mkts. The reason this is the case is that these two broad markets exist for different reasons.
Equity markets exist to facilitate capital investment and provide for transference of ownership; futures mkts are mechanisms for the transference of risk. Both have speculative components in their makeup, but speculation is the raison d'etre for neither one.
No one, bar the proprietor of a business, can really be said to be a ''natural'' owner of shares in a business. Equally, no one -- as you point out -- is a ''natural'' short for shares. The other way to say this is to define a ''natural'' as a person or institution who, because of the nature of their business enterprise, will almost invariably be participate on just one side of a (risk transference) mkt.
Does this clear things up a bit (hope, hope...g!)?
''...because of the nature of his/its business enterprise, will almost invariably participate on just one side ...''
Posted it too quickly, my apologies.
Yeah, I kinda suspected that futures might be inherently different from equities in that regard. Thanks!
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