Coldwell Banker Premier Realty

Housing Derivatives


Shiller on hedging RE
Posted: June 02, 2010 by John McClelland

It is very common in the United States and elsewhere to use markets to hedge risk. Farmers, who are long whatever they grow, often sell futures on those same products. That way if prices slide by the time they harvest and bring to market, they have already sold at the higher price if a price decline indeed occured.

I have been surprised that in the United States that futures products like the S&P/Case-Shiller are still thinly traded on the Chicago Mercantile Exchange. Property derivatives are much more popular in the UK. After all of the misery associated with poor risk management in the past couple of years you would think interest would increase. Nationally, home prices may still have some slack towards the downside, although I think bubble areas like Phoenix and Las Vegas are already trading at discounts because they fell faster (with annual rent/sale price ratios higher than 10). Commercial appears to have even more slack and needs to reset lower. Right now some sellers are trying to price in a recovery, but it will take at least several years to fill the vacant existing space. You really shouldn't see price increases in a widespread condition for some time. Having an efficient method to hedge these risks would be great.

REIT magazine recently interviewed Robert Shiller about some of these concepts. Its a quick read and worthwile. Please click to find it.

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