Home, Sweet (depreciating) Home?

March 31, 2006

My home is my castle, but I probably paid too much for it. Soon, I will be able to hedge myself against the end of the real estate bubble.

Now that the bubble has started to burst; now that the party's over; now that the housing ATM has run out of cash … everyone wants to index the downfall.  Or perhaps more importantly, they want to be able to hedge against it.

Less than a month after the Chicago Board Options Exchange (CBOE) linked up with the National Association of Realtors (NAR) to launch futures tied to median home price indexes in four U.S. regions, the information management company Fiserv and MacroMarkets LLC have teamed up with Standard and Poor's (S&P) to launch housing-linked index futures and options on the Chicago Mercantile Exchange (CME). 

The new products will cover ten metro area house price indexes known as the S&P/Case-Shiller Metro Area Home Price Indices.  The indexes will track the average price of a residential home in Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Commuter, San Diego, San Francisco and Washington, D.C.  There will also be a composite index reflecting national trends, which will be weighted on a market capitalization basis.  By compariosn, the NAR/CBOE indexes track the Northeast, South, Midwest and Pacific markets, alon with a national index.

In both cases, the indexes will launch in the second quarter of 2006, with the futures following shortly thereafter.

"For the vast majority of Americans, their home is their largest and most valuable asset, and in a period of rising housing prices and increased concerns about a possible housing bubble, reliable information on their biggest asset is extremely important," says David Blitzer, managing director and chairman of the Index Committee at Standard & Poor's. 

According to the Federal Reserve, the aggregate value of U.S. housing stock in the United States is $21.6 trillion, a number that is substantially larger than the total capitalization of all U.S. stocks - and nearly as large as the fixed-income market.  Until recently, there was no way for American homeowners to hedge their exposure to falling house prices - a fact that Karl Case, Robert Shiller and Allan Weiss believe drives up the "rent" on real estate prices may contribute to the boom-bust cyclicality of the global economy. 

Soon, our cup with runneth over.

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