Housing hedge?

[SeanO]

See... http://www.investor.reuters.com/Arti...t_%26_analysis

Per the article the Chicago Mercantile Exchange will soon begin trading derivatives based on housing prices, allowing one to hedge based on geographic indexes. Robert Shiller appears to have a hand in its creation.

Seems that if one loves where they live, but believe their property value is likely to decline this might be a way to isnure against the loss. My only concern is that losses may be in real, inflation adjusted dollars, rather than nominal prices.

A number of you have a lot more experience with hedging and I'd love your input and thoughts on this.

[jk]

a lot depends on how long you plan to remain in your house. if you want to lock in today's value and plan to sell within a few years, and assuming one of the regional housing subindices which will be offered is a close enough match to your location, then go ahead.

on the other hand, if you plan to remain in your house another 10 to 20 years you won't be able to cash out this arbitrage for a long, long time. that will be fine if you've made money on your futures. [i.e. the housing index has gone down, as i would expect] but if the fed can pump hard enough perhaps house prices will inflate further after a lull. [i doubt it, but you must think through this possibility]. you will then have losses on your futures positions which will be marked to market on a daily basis. you will have to pony up your losses and will only get that money back when you sell your house.

you might want to wait for the emergence of options on the futures. you could then buy puts on the regional housing index. this will limit your potential losses. if you don't want to wait for that, you could short or buy puts on the homebuilders index. the hedge won't be as exact, but it is doable right now.

[EJ]

See... http://www.investor.reuters.com/Arti...t_%26_analysis

Per the article the Chicago Mercantile Exchange will soon begin trading derivatives based on housing prices, allowing one to hedge based on geographic indexes. Robert Shiller appears to have a hand in its creation.

Seems that if one loves where they live, but believe their property value is likely to decline this might be a way to isnure against the loss. My only concern is that losses may be in real, inflation adjusted dollars, rather than nominal prices.

A number of you have a lot more experience with hedging and I'd love your input and thoughts on this.

Shiller to his credit is in his new edition of Irrational Exuberance open about the fact the book is at least partially editorial to sell his housing decline hedging product. My concern is that if not enough people buy the hedge, the insurance may cost more than the loss.

[SeanO]

Thank you both for the reply's and noting your concerns. Will be interesting to watch what happens with it, but I think I'll sit on the sidelines for now despite my continued exposure to the housing market (which is down dramatically since the report from the front, but still significant).