[Attention Surplus Disorder]

As I read the concept, these are futures contracts, not long puts, which cost to put on and become more valuable as the underlying (the house) declines in value. The "bet" would be initiated by selling the futures contract, generating cash upon sale. Covering the short would require cash. That moment in the game is, as you say, bullish, but it is bullish from the lower valuation. It is a bearish "bet" when the bet is initially put on.

[spokeshave]

OK I got it now....

I guess people with high risk aversion could get the cash from a home equity loan.

[AntiScumbag]

You've obviously never traded futures.

[jennyp]

Shorts can help a market reach its proper valuation more quickly - if all those shorts happen to have bet correctly. But short squeezes, where many shorts turned out to have bet wrongly and the market instead goes up a bit, are the bull's best friend because all the shorts have to quickly buy back their shorts at the same time.

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!

[SAJ]

If one is a homeowner, then his short sale of futures in this market is neither bullish nor bearish, merely a hedge. Assuming only that the homeowner doesn't overhedge, and does have some amount of hard equity in his home, settlement of the futures contract presents only a small problem should the market move higher. The homeowner (well, the sensible one at any rate) who hedges into a market than subsequently rises can, and should, settle his exposure by borrowing some of his equity. His only cost will be the carry, which, if the homeowner already has an equity credit line in place, will be limited to the interest on the putative loss. There is no actual loss here, of course; that's what a hedge is all about.

There's one exception to this, but only one. If the value of the homeowner's home in the case described above does not keep pace with the rising index, then the homeowner will actually lose capital. This implies directly that only those with relatively more attractive properties, i.e. ''nice neighbourhoods'' and so forth, should use this market to hedge.

I expect the mortgage industry to make a good thing of this market, as long as it lasts (which I don't think will be very long; see my other posts here), by offering a package of complete hedge services to upscale homeowners. The usual homeowner is not going to be terribly savvy about the possibilities here, and I daresay the mortgage bankers can generate quite nice fees from this service. The fly in the ointment will be the title industry, although they might decide to play here, too -- who knows?