Tuesday, as I was wandering around in an exam-prep haze, I picked up a copy of the Financial Times ($) to read with my meal at the South Street Diner.
I read the article on the dearth of LBOs, and the one about the developing a taste for the stock of super high calorie burger purveyers. But it took until today for me to read the article on Housing Options "Hedge around your home" written by Doug Cameron.
My parents have had to move frequently. And yet, because they have had to move according to the dictates of the Department of Defense, they had little opportunity to hold on to a particular piece of real estate in order to get the best price. That is, frequently they had to sell into a soft market, and frequently had to buy at a premium.
One problem with selling a house is that the price will eventually swing along nicely with the long-term-average for the area, but any particular house, being sold at any particular time, could go for more or for less. The real estate market suffers from an information defect relative to, say stock, because every combination of house and land is considered unique in the whole world. With a stock, you know that if someone, anywhere, just bought it for price x, then you can probably sell it for price x yourself: the individual shares are identical in the bundle of rights they convey to the holder. This leads to excellent reliability in reported prices for shares, while estimates for "how much is my house worth" will vary wildly.
Now, what I've always wanted is the ability to purchase a contract to protect yourself against declines in the price of your home. Say that, for instance, you bought your house for $100,000 dollars. Wouldn't it be nice to get someone to promise that, if you sell your house two years from now, if you sell it for less than $100,000, that they will pay the difference. In other words, if you wound up selling your house in two years in a soft market for $93,000 the holder of the contract would send you a check for $7000 dollars.
Now, you might ask, why would anyone take the trade? Simple, because you would have to give them money for the protection today. (In my example, let's call that fee $1,000--real financial types could estimate the real amount.) And, if the house isn't sold, or is sold at anything above $100,000, the homeowner doesn't get a single cent from the contract.
Now, as it turns out, the system announced in the FT Article is going to be more complex (and frankly, I don't have the time right now to figure out all the details.) From what I can tell, it will use an index based off of housing sales for particular markets, but the underlying idea is the same.
Quoting FT:
A similar shorting strategy would allow homeowners planning to move within a limited time to lock in the current value of their property, with the contract paying out the difference, or at least part of the difference, if house prices decline before their planned move.
Trading should start next month, and here's the link and the brochure (pdf) from the Chicago Mercantile Exchange.
3 comments:
Makes me wonder if those who aren't pressured to sell, either because of time or circumstances, would sell faster in a so-called "soft market" simply because they know they aren't losing any money (provided they're willing to kiss off the up front contract money)
Hopefully they would. In fact, such sales would have two salutory effects:
Sales could happen faster (and thus sellers could have money now, rather than at some point in the indefinite future.)
The buyers would be paying less, and would be able to take advantage of a lower price level. Right now, the incentive is for houses to stay on the market until the market price meets or exceeds the last-sale price. And yet, everyone would be better off if the sale happened at a lower price.
And the price information is also important for things like property taxes. If a house sold at a lower price, then the taxes could be lowered on surrounding properties as well.
I don't know of a market for such hedging, but sometimes when companies ask employees to relocate, they do guarantee a minimum price for their old home to sell, based partly on the cost of the real estate market in the new locale. I think my uncle is negotiating for something of this sort in moving from suburban Dallas to Seattle in order to work for M$
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