Sunday, May 29, 2005

Short your house

What if the U.S. housing market really is a bubble? And what if it is about to take a big nose-dive? What then?

Even though many economists and loads of homeowners agree that today's housing market bears remarkable resemblances to tech stocks five years ago, there's just not much that most folks can do about it. If your exposure to real estate is your own home, you're not likely to sell now just so you might be able to buy a bigger or better one in a couple of years. Where do you live in the meantime? And if you're waiting for prices to fall to buy a home, how do you know where the bottom is? What if a correction never comes and your dream home just keeps getting farther away?

Robert Shiller, a Yale finance professor and author of "Irrational Exuberance" just might have the solution. He is a lead figure at Macro Securities Research.
The New York research group has developed financial instruments--called "MACROs"--–that will be tied to a housing index that tracks property values in certain cities. By purchasing Up MACROs or Down MACROs, investors would be able to place bets on whether a property market is going to keep rising, or whether it's going to fizzle.

In effect, speculators could play the bubble: They could short the City of Angels and go long on the Big Apple, or vice versa. Homeowners in bubbly markets could hedge against a pop. They could stand to gain if the value of their homes go down. If property values keep rising, of course, the homeowners lose on their MACRO investments -- but at least their homes would be worth more.
MACRO has filed plans for the new securities with the Securities and Exchange Commission and hopes to have them begin trading on the American Stock Exchange later this year.

Anyone interested in hedging the value of your house? What markets would you short, betting values will fall and which markets would you go long, betting prices will rise?

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