Futures and property values: you can bet on the bubble

Last November, Slate magazine posted a piece on the housing market futures. The gist: you can hedge a drop in your house’s property values by buying derivatives that pay if the region’s property values drop a specific amount over a specific time period or even if predicted growth doesn’t materialize:

Next spring, however, investors might finally have a better hedging product. Just in time for the apparent top of the housing market, the Chicago Mercantile Exchange is introducing futures and options on housing prices in 10 cities for the second quarter of 2006.

It’s pitched to big institutions, but it would probably benefit individual investors immensely. That is, if they used it. Unfortunately, the individual home owners it would benefit the most didn’t have enough cash on hand to put money down on their house and are currently just paying interest, so they probably don’t have extra money to invest in hedges.

Also, as Ardell eloquently pointed out a while back, different sectors of the market can “pop” at different times and at different rates. Unfortunately, this could only protect against region-wide shifts:

These options will cover large markets—it will be tough to hedge the value of your own house, which depends so much on your particular neighborhood.

I liken it to buying an index fund (or mutual fund) instead of a single stock, although maybe insurance against extreme price swings is a better analogy; the effect is to reduce the upside and the downside of your investment. It doesn’t seem very exciting in the least so I’m putting this one in the “popular after the crash” basket, as it’s hard to plan for hard times when the good times have lasted so long.

So who’s buying on opening day? And can the market correctly predict housing prices over the next few years, or are investors so oriented toward a bubble popping that they can’t see the inherent strength of the market (or vice versa)?

2 thoughts on “Futures and property values: you can bet on the bubble

  1. Every year it is the same thing, difficult to call how the market is going to head until we get into April. There are significant issues that are apparent in today’s housing climate compared with summer 2005. Such as the great urban legend of 80 condo sales in one night in Downtown Kirkland, vs. the trailing sales of the condo development just next store at this time.

    Personally I think it is just the difference between February vs. June, but we will know for sure come April.

    Having been in the banking industry the day stock brokerages became able to compete with us in the Trust industry, by having mutual funds…I believe the housing market hedge funds will have the same issues as stock and bond funds. Those that are income oriented will differ greatly from those that have principal increases as their primary objective.

    I am wondering how the 1031 Exchange “funds” are doing. Those who sold off all of their properties to “buy into” a 1031 fund to meet their tax requirements. Anyone have any word on those?

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