Real estate's next buying opportunity

If you're looking for a way to invest in a home without the pain of ownership, housing futures could be the answer.

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By Stephen Gandel, Money Magazine senior writer

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(Money Magazine) -- Wouldn't it be cool to invest in a house without the pain of owning it? No painting or fixing, no worries about the tenant's furnace cutting out in the middle of the night.

The means to such a pleasant end are real estate futures, co-invented by Robert Shiller, Yale economist, author of the bestseller Irrational Exuberance and predictor of the collapse of the recent housing bubble. Futures could offer investors a quick way to get in and out of the housing market and homeowners a way to hedge the equity in their homes. If you haven't heard of them yet, don't feel bad.

"They just haven't caught on like I expected," says Shiller. That might be changing.

Up until now: For a long time, the only way to invest in residential real estate was to buy a house. You earned income if the rent you got more than covered your expenses. Then if the price went up, you pocketed the gain when you sold. That gain on selling was all anyone focused on in recent years.

Of course, the opposite was true too. If prices sank, you could be stuck with a white elephant that you still had to heat and light.

The next evolution: Two years ago, the Chicago Mercantile Exchange, with the help of Shiller and others, launched housing futures, which track the S&P/Case-Shiller Home Price Indices for 10 metropolitan areas and a composite that represents the nation. The price of a housing futures contract rises and falls with the market's perception of where housing prices will be in six months or a year, depending on the date of the contract.

So far, so good. But here's why contracts make interesting hedges: To purchase one $50,000 housing futures contract, you need invest only $2,500. With that kind of leverage, a 5% rise in the housing price index would double your money.

The same investment in a house, assuming you put 20% down, would grow by 25%. Of course, if the index were to drop 5%, your futures contract would be wiped out. Leverage cuts both ways.

Shiller predicts that the main traders of housing futures will be builders, who will sell contracts to hedge their inventory. (When you sell a contract, you make money when prices go down.) All of that business-related selling could pressure prices unrealistically.

Indeed, in mid-April, futures were predicting that home prices in Los Angeles would fall 33% this year. That's nearly double the drop forecast by Fiserv Lending Solutions. And that, says Shiller, might just mean something you haven't seen in a while in real estate: a buying opportunity.

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