here you go LIL-real estate futures

[marc26]

Placing a New Bet

Futures and options on real estate may take away risk, or add it
By THOMAS G. DONLAN

Speaking About Money

SO YOU THINK THERE'S A REAL-ESTATE BUBBLE that's about to burst? Now you can put your money where your mouth is. Protect your lifetime of paper profits in a modest $2 million home in Palo Alto, Calif., without selling it. Starting May 22, you can simply short a real-estate index on the Chicago Mercantile Exchange.

Or maybe you're bullish: If you are a young person in Los Angeles without the means to service a mortgage on a $350,000 efficiency condo, you can participate in the rising realty market anyway. Just take your down-payment fund and go long in options on futures on the Los Angeles real-estate index. You can have almost the same kind of leverage that your friend down the street has with his adjustable-rate, interest-only, negative-amortization mortgage, and you can avoid exorbitant monthly payments.

For this market convenience, bulls and bears in real estate can thank economists Karl E. Case of Wellesley College and Robert Shiller of Yale, who created local house-price indexes in 1991. Their firm, Case Shiller Weiss, publishes indexes for Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, the New York commuting suburbs, San Diego, San Francisco and Washington, D.C. With more than a decade of experience at gathering and reporting the data, the indexes are solid enough to form the base for futures and options contracts for the Chicago Merc. (The Chicago Board Options Exchange and the International Real Estate Exchange in London also have contracts in the works; an Internet commodities exchange called HedgeStreet has been making a small futures market in real estate for nearly a year.)

The aging homeowner in Palo Alto and the young renter in L.A. have assumed risks in real estate that they do not like and cannot avoid -- one has too much property and the other has too little.

Call it hedging, if you like. Another name for it is gambling. House prices go up, and then they go down. And then, if the stars are properly aligned, they go up again. Timing the cycle is sheer speculation.

The sensible way to play real estate is to save a 20% down payment, which will take long enough that you have a chance of making your purchase during a recession, or at least during a lull in the market. Then you select a house that will not eat more than a third of your pretax income. Time is on the side of investors taking this approach. In the long run, home prices generally rise at least as fast as the currency depreciates, and a growing population provides a bullish bias.

If this sort of investing sounds antediluvian, consider the meaning of the word. Every now and then, the flood does come. It came in California in the early 1990s; it came in Colorado and Texas and Boston in the 1980s. Those who couldn't wait out the downswing sold at losses that could be substantial. Some just walked away and mailed their keys to the bank.

Macro Securities Research of Madison, N.J., designed the futures and options contracts on the Case Shiller indexes. CEO Samuel Masucci III makes the case that this is a huge public service:

"Housing is one of the largest asset classes in the world, with approximately 75 million homeowners and tens of thousands of institutions and investors with exposure through new-home construction, lending and mortgage-backed securities," he says. "There are also many institutions looking to gain exposure to this unique asset class. Creating capital-market liquidity to housing is long overdue."

Wait a minute. Did he say that housing needs more capital-market liquidity? Where does he think the real-estate bubble came from, anyway? Irrational exuberance is fueled by easy money. And, yes, the Robert Shiller who made famous the "unkillable" phrase about the stock market is the same Shiller who participated in creating these real-estate indexes.

Shiller has been warning about real estate, as he should be. Ever since specialized housing finance lifted house prices out of the Great Depression, housing has been riding a great wave of federal sponsorship and federal subsidy. Every financial innovation in housing has added to the pile of capital in housing, and added to the leverage that makes that capital the most powerful force in America.

The measure of success is the Federal Reserve's estimate of the value of U.S. residential property: $21.6 trillion -- more than the stock-market worth of all public companies. Nearly 70% of American housing units are owned by the occupant. In the hottest areas, a person can rent a condo or house for about half the after-tax cost of ownership. That's the power of low-cost capital, the power of leverage and the power of speculation.

Now we add a new way to throw capital at housing. Futures and options on real estate reduce risk for some by adding to it for others. The danger is that those who are taking more risk won't realize that they are until it's too late

[LivinLOS]

Had read about either this or a similar index that could be traded..

My main beliefs is a loss of confidence in paper assets and fiat currency in general and an under pricing of risk.. The house price part is only one spoke in the wheel..

[ElectrO]

In America, its the first month houses have taken a dive in property value. It was on the news in the UK.

E

[LivinLOS]

Coupled with a 0.9% PPI monthly inflation rise.. Coupled with more rate rises in the future..

Big info for me is Russia is thinking of launching a ruble based oil exchange.. Now if oil and petro dollars are not being bhought theres another nail for the USD's coffin..

Think defensive..