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Recent articles by Kim Khan: • The 10 richest U.S. counties, 3/28/2006 • True cost of Christmas: $18,348.87, 11/29/2005 • TV flop takes toll on Martha's stock, 10/26/2005 More... |
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| Place your bets -- on home prices | |||||||||||||||
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A new type of investment means you don't have to own a home to profit from rising (or falling) home prices. It also could be a boon to both home buyers and sellers. By Kim Khan The housing markets boom has been good to you. Your home jumped in value and youve refinanced at a decade-low interest rate. But now folks are talking about the end of the housing bubble. And the for-sale signs in the neighborhood are lingering a bit longer. If only there were a way to lock in your real-estate gains without actually selling your home. Now, there's a way, or at least a start. New housing futures and options contracts began trading on the Chicago Mercantile Exchange May 15, promising to track home values in various cities. Eventually, they could be a great tool for homeowners wanting to protect themselves against the volatility of home prices The catch? It may be a while. 10 housing markets to choose from There are plenty of potential uses for these new home-price-tracking investments. Would-be homeowners not quite ready to buy could use the futures to make sure their down payments keep pace with local housing prices. Risk-taking investors in New York could make bets on the fortunes -- good or bad -- of homeowners a continent away in Los Angeles. The instruments -- called the S&P CME Housing Futures and Options -- will be based on the housing indexes developed by economists Robert Shiller and Karl Case. Investors will be able to try to profit by predicting whether home prices will rise or fall nationwide, or in one or more of 10 local markets: New York, Los Angeles, Chicago, Boston, Miami, Washington, San Francisco, San Diego, Denver and Las Vegas. Here's how they work: The size of a contract is $250 multiplied by the value of a city-specific index. For Los Angeles, that means a single contract costs $67,000, Shiller told CNBC's "Squawk on the Street." Investors who buy a contract will see their investment increase or decrease along with the index. Conversely, investors can sell a contract and benefit if the index of home values falls. Tracking the change in value of actual dwellings, the home-price index works much like the Labor Departments consumer price index, which tracks the price of a basket of goods to gauge overall inflation. Unlike stock indexes, the home-price indexes do not impact the prices of homes in those markets. The indexes don't own any physical homes. Nor do the futures and options contracts. Each individual contract will expire after a year, but there are tentative plans to launch longer-maturity instruments. Like all new financial instruments, though, it will take time to determine how well they work. Big investors lead the way The first investors will likely be big institutions like pension funds, hedge funds and insurance companies, which already have shown interest in the products, according to the CME. After those first buyers have created a certain amount of trading volume -- and thus provided some price stability -- retail investors may dip a toe into the market. Chris Cordaro, chief investment officer at RegentAtlantic Capital, an investment advisor that specializes in personalized wealth management services, said he will use the contracts as a hedge against various real-estate investments of his individual clients. But not immediately, and "certainly not on the first day of trading." "We dont have a champion yet, someone who will really go out and support pricing," said Fritz Siebel of Tradition Financial Services, which will be an executing broker of CME housing futures. It could take a little while for the champion to appear, particularly because summer is a slow season for trading. Protecting the soon-to-be-empty nest If and when a market develops, though, homeowners should be able to protect themselves against falling prices. Consider this example: A New York couple wants to move to a smaller home, but can't until the couple's youngest child is ready to leave the nest in a year or two. By using New York housing futures -- in this case to make a bet that New York real estate prices will fall -- the couple would be protected from a decline in the value of their current home. But doing that isn't cheap. To hedge the value of a $670,000 home in L.A., the owner would need to use 10 contracts that increase in value when the index tracking home values in the area falls. If the index falls by 10%, the value of the contracts increases by the same amount -- in this case $67,000 -- covering the couple's potential loss. Clearly, $67,000 contracts are going to be out of the range for the typical homeowner. But if the futures catch on, there's a good chance that financial institutions will find a way to tap into that market. "We've been advocating what we call home-equity insurance, which would actually be an insurance policy that insurers would sell on home value," Shiller said. "I think most homeowners would be more comfortable with an add-on to their insurance policy than going into the options market and buying a put." A few years down the road there could even by a housing exchange-traded fund (ETF), Siebel said. Investors could just stick shares of the ETF in their 401(k) as a long-term bet on the housing market. After all, real estate is an even bigger asset class than equities, Shiller said. For the daredevils Some investors may not be content to just sit back and hope for long-term gains. And there is always the option for active traders to trade housing futures just like they do gold, oil and currencies. But those involved with the new housing futures are warning against such high-risk strategies. "It's pretty tough to trade derivatives at a customer level," Siebel said. For now, he suggests leaving such trading to the pros. | |||||||||||||||
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