Selling L.A., buying Chicago
Scared your home's value has topped out? Be on the lookout for hedging products due this fall.
August 9, 2004: 4:34 PM EDT
By Sarah Max, CNN/Money senior writer

BEND, Ore. (CNN/Money) If you're like most Americans, much of your net worth is tied up in a single, illiquid asset: your house.

"Don't put all of your eggs in one basket," warn financial gurus.

Yeah, well what's a homeowner to do?

Unlike a portfolio of mutual funds, you can't rebalance your real estate holdings at the press of a button. Buying and selling residential real estate is, for the most part, an all or nothing proposition to which the terms "taking profits" or "dollar cost averaging" don't really apply.

In fact, aside from making sure you have savings stashed elsewhere, there's really not a lot you can do to hedge against the possibility of sinking home prices.

That may soon change.

At least two firms, Macro Securities Research and HedgeStreet, are in the process of introducing securities that will allow investors to hedge against falling prices in their own market and speculate on another market without actually having to buy property.

Macro Securities Research (MSR), which was founded by Yale economist Robert Shiller and his former student Allan Weiss, plans to offer its securities to accredited high-net-worth investors within the next couple of months and has filed with the Securities and Exchange Commission for approval to market its securities to the general public.

"This is something we've been dreaming about for almost 12 years," said Weiss, who first conceived of the idea of home equity insurance in the early 1990s after seeing home values in Boston drop significantly.

Under MSR's program, individual metropolitan areas will each have a "safety" security, which rises in value if home prices in a given market go down, and an "investor" security, which rises in value if home prices go up. That is, if a share in each of these securities initially costs $100 and home prices go down 10 percent, the safety share will be worth $110, while the investment share will be worth $90.

Just as stock prices reflect expectations for future earnings, prices of these securities should reflect investors' expectations for future home prices rather than the underlying index.

"We want these to be analogous to owning a share of stock," said Weiss. The securities will be backed by U.S. Treasuries, will pay out quarterly dividends and can be held for decades before they expire. The fee structure has not yet been finalized, said Weiss, but should be on par with mutual funds.

HedgeStreet , meanwhile, will open its online exchange in October, inviting investors to take a position on whether home prices in Chicago, Los Angeles, Miami, New York, San Diego and San Francisco will increase or decrease in any given quarter. Investors will do so by buying contracts, or "Hedgelets," priced between $0 and $10, depending on market sentiment.

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HedgeStreet's contracts will expire every quarter and will be settled according to yes or no outcomes. For example, an investor might pay $5 per contract to take the position that prices in San Francisco will fall at least 2.25 percent in the coming quarter. If prices, as measured by the Office of Federal Housing Enterprise Oversight, do indeed decline 2.25 percent or more, the investor receives $10 per contract. If priced don't decline that much, the investor receives nothing, losing the $5 per contract investment.

Investors need a minimum of $500 to open an account and begin trading. Trading fees are $5 (total) for the first 100 contracts, 4 cents each for the next 900 contracts, 3 cents each for the next 90,000 and 2 cents each if you buy more than a 100,000.

"We think there is an enormous market here," said Russell Andersson co-founder and president of HedgeStreet exchange, which will also offer securities derived from everything from gas prices to healthcare costs. "It allows people to manage everyday risks in their life and to speculate."

Institutional investors have already expressed interest in such a security. "If new instruments and vehicles arrive that allow us hedge some of our holdings, get in a [a housing market] more liquid fashion or get more diversified then we're ready to take advantage of it," said Thomas Skinner, managing partner of Redbrick Partners, a firm that invests in exclusively in single-family housing.

Ultimately, such securities may also serve as a leading indicator of home prices, which would be useful to investors, builders, developers and anyone else with a stake in real estate. "People can get a view on what the market really thinks," said Andersson. "There is tremendous value in knowing the consensus."

A hit among homeowners?

At a time when home prices are still soaring, homeowners may be more inclined to use such securities purely to speculate on other markets rather than to try to hedge against falling home prices.

Homeowners in Syracuse, NY already have access to a Home Headquarters program that allows them to essentially insure their home equity by paying a 1.5 percent premium on the value they want to protect. For example, homeowners might pay $1,500 to protect $100,000 of their home's value. After a three-year waiting period, if average prices in that zip code decline 10 percent, the home sellers receive a $10,000 check, even if their own house goes up in value.

Since the program was launched in August 2002, however, only 76 homeowners have signed up, according to its director Virginia Smith.

"Everyone is too excited about rising home values," she said.  Top of page

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