NestEgg Home Buying: Bay Area Real Estate

Shorting Real Estate in UK

If you're going to put 50%+ or your networth in down payment and take on a huge mortgage, wouldn't it be great if you could hedge against a bubble. 

Here's a article on shorting real estate in London:

SECTION: Features; Money; 1

LENGTH: 949 words

HEADLINE: High-risk gamblers bet the house on it

BYLINE: Joe Morgan and Alex Hawkes

BODY:

SPREAD-BETTING used to be largely the preserve of thrillseeking City traders, taking punts on anything from the ups and downs in the FTSE 100 index of leading shares to fluctuations in oil prices, or Kevin Keegan's tenure as Manchester City manager.

But this highly risky form of gambling, where you "buy" or "sell" the movement of a market or an index, has recently gained a new following among people that do not have a view on the outlook for Brent Crude, but who do feel they can back their hunches when it comes to property.

Spread-betting on the housing market is a growing craze, with most players speculating that prices in

London

and the South East are set to slide. This is known as "shorting the market". The recent wave of betting was sparked by recent warnings of falls in the property market.

The new property spread-betting gang includes women who would never venture inside a high street bookmaker's shop: you can place your spread-bets online or over the phone. Another attraction is that any profits are tax-free, supposing that you make a profit. The appeal of property market spread-betting also lies in the ability to make money out of bricks and mortar without hassle.

The price to pay for this convenience is that spread- betters who get it wrong can find themselves facing unlimited losses, for which there is no compensation.

IG Index, the spread-betting firm, prices its property market bets using data from the Halifax House Price Survey. Punters can bet on the prices of houses nationally, or in a specific city or region, and have the option of capping their losses.

The firm is predicting that the average price of a

London

house will fall 5.6 per cent from £244,600 in June to £230,900 next June. But some contrarian gamblers are determined to defy the property pessimists by taking a punt on the market in the capital remaining resilient. IG does remain confident that the Scottish market will stay buoyant, with average prices climbing from £95,700 to £102,400 by next September, a rise of 7 per cent.

As we explain below, the property market is just one area in an ever increasing range of spread-betting opportunites. All are complex and dangerous. Anyone who cannot afford to lose money should read and marvel, but stay away.

Currencies Currency trading is becoming more popular, according to such firms as Finspreads and Capital Spreads. Simon Denham, of Capital Spreads, says: "Spread-betting on currencies is as close as private investors can get to trading the inter-bank rates used by financial institutions."

Further information can be found on websites such as onewaybet.com.

Binary bets Although technically not a spread-bet, binary bets are the latest craze among clients at IG Index. Structured to give gamblers the chance to profit from short-term market fluctuations, a binary bet is typically placed on the probability of movements in markets such as the FTSE 100 index. This may sound simple, but the workings of the binary bet system are anything but.

IG Index will take a view on how likely it is that the FTSE 100 will move in a certain direction. Odds of 50 per cent imply that the market will stay flat. If the firm offers a 90 per cent chance that the index will rise, this means that it is likely that the index will close higher. Say the FTSE 100 has been 11 points up all day, suggesting that the market will close at a higher level than the previous day, IG Index could decide that there is a chance of between 6 per cent and 9 per cent that the index will fall and close at a lower level. If you believe that the firm is wrong, and the index will fall, you buy at 9 per cent.

If, after you have made your bet, the FTSE 100 falls, IG will change its odds. The firm now believes there is a 40 per cent chance of the index finishing lower than the previous day. Your profits will derive from the difference between the original 9 per cent chance and the new 40 per cent chance.

US

stocks Spread-betters have been looking at US shares for opportunities in volatile stocks. Google, the internet search engine, has topped the list of must-have stocks after its flotation on Nasdaq. Will Armitage, of IG Index, believes that many spread-betters realised the potential of US stocks when they saw investors shorting Google shares in the unofficial grey market before the company's flotation last month.

Cantor Index, another spread-betting firm, says that the recent upturn of the S&P 500 and Dow Jones industrial average has buoyed gamblers, with Wal-Mart, Sears and Nike all attracting attention.

* Spread-betters gambling on stock markets "buy" or "sell" at a bookie's spread of possible future levels of the market.

* If you buy, and the market goes up by more than the bookmaker's top "buy" price, you win your stake multiplied by the difference between that price and the final level.

* Spread-betters on the housing market predict how much more or less expensive houses will be at a future date.

* If house prices rise by less than the bookmaker's "buy" price, or fall more, and you bought in the hope that prices would move above the "buy" price, you lose the difference between the price you paid and the final price. Every thousand pounds you are out is multiplied by your stake.

WSJ on Shorting Real Estate Indexes

Now if they could only do this on a regional basis and create an index for the Bay Area.

Capital: New Futures Could Help Folks Insure Against Economic Risks

By David Wessel. Wall Street Journal. (Eastern edition).

New York

,

N.Y.

: Sep 5, 2002. pg. A.2

BEGINNING NEXT MONTH, speculators bored with trading mortgages, credit-card receivables and heating-oil futures will be able to bet directly on the number of Americans who have jobs.

At first, this sounds like a bad idea, one that strips away all subterfuge and truly turns Wall Street into a betting parlor. Imagine the bearish trader celebrating as wire services report that

U.S.

employers cut their payrolls in September. The more layoffs, the more he makes. He cheers. Cue the angry mobs.

Although individual investors won't be able to participate just yet, this may be a step toward something more socially useful: a way for ordinary Americans to insure against risks such as falling home prices, a sinking economy or a resurgence of inflation.

"The sharing of economic risk is one of society's deepest concerns, and rightly so,"

Yale

University

economist Robert Shiller says. "To the extent that inequality is created by pure luck, it's not only painful, but a shame." Sharing harm from bad luck is the reason for life insurance and government insurance against temporary unemployment. Global financial giants offer big companies ways to hedge the risks of unwelcome turns in interest rates, currencies and commodity prices. So why, Mr. Shiller asked in a 1993 book, doesn't our increasingly sophisticated market system allow more ordinary folks to share their largest economic risks?

The short answer: No one institution is wealthy enough to shoulder these risks, and most early attempts to develop markets to spread the risks have flopped. The Coffee, Sugar and Cocoa Exchange's attempt to establish a futures market in the consumer-price index, essentially insurance against inflation, died in the early 1980s as a result of lack of interest. The London Futures and Options Exchange's experiment with betting on real-estate prices collapsed in the early 1990s amid reports that false trades had inflated trading volume.

A few innovations succeeded. The

U.S.

government now sells inflation insurance in the form of Treasury bonds that pay more if inflation rises. Property insurers sell homeowners' policies that automatically increase coverage with rising construction costs. A few communities have followed

Chicago

in offering insurance against declining house prices to encourage home buying in changing neighborhoods.

Growing anxiety about the riskiness of economic life and the potency of information technology are fueling intriguing new innovations. In

London

, where signs of a housing-price bubble are proliferating, two firms, City Index and IG Index, are taking bets on housing prices. They offer a way to speculate on real estate without owning anything, and a way to hedge against declines in the value of one's house; trading volumes are still light.

Mr. Shiller, enjoying new public attention because of his prescient warnings about the stock market, is pressing the cause. He has a new book on all this coming out in March and has started a company that is trying to get stock exchanges and investment bankers to trade real-estate price indexes.

IN THIS LATEST EXPERIMENT, Goldman Sachs Group Inc. and Deutsche Bank AG next month will begin selling what they call "economic derivatives." The first auction, set for Oct. 1, will allow hedge funds and other institutions -- no individual investors welcome -- to place bets on whether the Labor Department will report on Oct. 4 that payrolls fell by 150,000 workers in September or rose by 250,000 workers, or any increment of 50,000 in between. Think the market is much too gloomy about the economy? Then put down $6.30 and get back $1 for every 1,000 jobs added in September above a threshold of 150,000 jobs. If the number comes in below that, you lose your money; if it comes in above 156,300 jobs, you get back more than you put down.

The actual payoff will depend on what other players are putting down. Just as at a horse track, the odds change as bets are placed. At a horse track, you put down $5, and the payoff depends on the odds. In this economics-derivatives market, the payoff is fixed and the sum you put down reflects the changing odds. The whole operation is a sophisticated form of parimutuel betting, developed by a

New York

start-up called Longitude Inc. There isn't any limit on the size of the bet that can be placed, but there also isn't a guarantee that every order will be completely filled.

In ordinary futures markets, an investor places a bet, a market-maker such as Goldman takes the other side and then looks for a buyer. In this market, there isn't any need for a market-maker. Like the owners of a racetrack, Goldman and Deutsche Bank make their money by taking a slice of the action. The backers hope this structure will lure more players and help the market grow, unlike previous failed attempts. Later this year, Goldman and Deutsche Bank plan to take bets on the

U.S.

government's monthly tally of

U.S.

retail sales, the monthly manufacturers' purchasing-managers index and

Germany

's IFO business-confidence index. Their primary interest isn't in Mr. Shiller's grand social goals, but in making money by offering big companies new ways to hedge, perhaps selling a big retailer a way to cushion the pain to profits if consumer spending sags in the next six months.

But Mr. Shiller argues such new markets often begin by serving sophisticated traders who provide liquidity and a base for future growth. Only later will insurance companies and other retail financial institutions create insurance policies that ordinary folks can use. A labor union, he suggests, might someday bargain for insurance that pays off if the national -- or, someday, the regional -- hiring picture sours. Or property insurers might offer, along with fire, flood and theft insurance, policies that pay off if your house turns out to be worth less than you paid for it.

Human beings tend to minimize the risks in their lives; insurance is often a hard sell. But over time, the coupling of Wall Street's savvy and lust for gambling with the marketing prowess of American finance could make life less painful for the unlucky among us.

Protecting Your Downside New Hedging Indexes

Here's a slightly dated article on new instruments that Robert Shiller, an economist out of Yale, is creating to hedge against real estate price declines.  The indexes will be listed on the Chicago Mercantile exchange and rumor is that LA will be the first test market.  Can't wait until they create one for the Bay Area!

Another set of derivative products linked to home prices was introduced in October by HedgeStreet, which specializes in online trading of pint-sized contracts it calls ''hedgelets" for each of six cities: New York, Miami, Chicago, Los Angeles, San Francisco and San Diego.  However, these "bets" are only for $10 which, unless I'm missing something, make them all but worthless

======================================

December 12, 2004 Sunday Times

IF you have owned a home for several years, you may be sitting on a sizable increase in equity. And if you are worried that the run-up in housing prices can't last much longer, you may think the only choice is to call a broker, rent a moving van and head for the (less expensive) hills.

But through an increasing number of new investments, you may be able to limit future erosion of your home's value.

Macro Securities Research, a company affiliated with Robert J. Shiller, the Yale economist, has reached an agreement with the Chicago Mercantile Exchange to list pairs of derivative instruments that are essentially index funds linked to home prices in certain markets. One instrument in each pair will rise as its market index rises; the other will rise as the same index falls. That will let investors bet on the direction of housing prices. Similar, but less sensitive, vehicles are being offered by HedgeStreet, a firm in San Mateo, Calif., that offers small-scale derivatives speculation online.

For homeowners looking for alternatives to the risks and complications of derivatives trading, there are also insurance policies that pay out if home prices fall, but they are only available in certain areas, and the conditions for collecting are highly restrictive.

In fact, none of these approaches are likely to provide anything close to a perfect hedge, eliminating all risk of loss. And while the options available to nervous homeowners are growing in number and sophistication, some advisers warn that they may provide minimal protection from the vicissitudes of the real estate market.

But other, simpler strategies may help you prepare for a softening of the market, they add. One is to avoid variable-rate mortgages before any serious increase in interest rates -- an event regarded as a possible trigger for a reversal in home prices.

Macro Securities hopes to list its instruments in Chicago before such a reversal, but the exchange's announcement this month was short on details, like a starting date. Mr. Shiller, the company's chief economist, said that his securities would track home price indexes in cities yet to be chosen, although strong candidates include New York, Los Angeles and Las Vegas, he said.

The minimum investment for the securities and the amount of leverage built into them are also not yet known. A one-percentage-point move in the index, he said, may produce a change of two percent or three percent in the value of the securities.

An important feature of the Macro securities, he said, is that they will come in twos -- one moving in tandem with the index and the other in the opposite direction. Having a single index fund would require a hedger to sell short, raising the theoretical prospect of an infinite loss. (That could happen only if housing prices rose to infinity -- not a far-fetched idea to many people who are looking to buy a co-op in Manhattan.)

Another set of derivative products linked to home prices was introduced in October by HedgeStreet, which specializes in online trading of pint-sized contracts it calls ''hedgelets.'' Each is a yes-or-no wager that a housing index will be in a certain range on a given date within three months. After that period, the contracts expire, and losing bets are worthless.

There are three residential property bets, representing percentage moves in an index whose level may be higher, lower or even with the recent trend in home price movements, for each of six cities: New York, Miami, Chicago, Los Angeles, San Francisco and San Diego.

But the value of each contract is a paltry $10, and they are infrequently traded, at best, so unless you live in a matchbox, it would be difficult -- and very expensive -- to buy enough of them to provide a practical hedge.

Russell Andersson, a vice president of HedgeStreet, said that the products were new and were still seeking an audience. He conceded that their three-month life span was too fleeting for use by many homeowners and said that HedgeStreet was planning to introduce vehicles that would trade much like futures contracts and last for one and three years.

''With a combination of these two products, you can hedge out very aggressive short-term movements as well as longer-term movements,'' Mr. Andersson said.

Mr. Shiller says his approach to defending against price declines is meant to be useful even for people with modest incomes. ''We're looking for a vehicle with widespread acceptance,'' he said. The device of two separate funds is one way to gain it, in his opinion. ''It means there is no loss beyond the initial outlay, no margin calls,'' he said.

That may not be true if leverage is built into the instruments, as Mr. Shiller envisions. But homeowners looking for further protection may consider borrowing against their equity, knowing that it will rise enough to make up any decrease in the fund's value, he said. Should home prices fall, the value of the fund that is inversely correlated to the housing market will rise, mitigating the loss.

''Volatile markets are increasingly becoming a part of our lives,'' Mr. Shiller added. ''The home market itself is becoming more volatile. We're in the biggest real estate bubble in history, I believe.

''We haven't seen a swing down yet, but it could be coming,'' he warned. ''There are people with big houses and big mortgages who are going to feel the pinch.''

Jonathan Golub, a strategist at J.P. Morgan Fleming Asset Management in New York, agreed. The culprit in a downturn, he believes, will be big mortgages, more than big houses. Variable-rate mortgages, in particular, could be a problem.

When interest rates are low, buyers can afford more house for the same monthly payment, said Mr. Golub, who himself is a renter in Manhattan. He said that any holder of a variable-rate mortgage must understand that ''if interest rates drop, the house is worth more to me, and vice versa; if rates rise, I'm toast.''

Burned on both sides, too, because the higher mortgage payments tend to depress home prices. ''You get hit with a double whammy,'' he said. ''The cost of carrying goes up and the value goes down.''

NATIONWIDE, he noted, home prices rose 7 percent a year, on average, from 1999 to 2003, roughly double the rate for rental prices. Over the previous 15 years, the two rose more or less in tandem, with one outpacing the other for a while before the pattern reversed.

Mr. Golub says he expects home prices to hold up until mortgage rates rise further, so there is time for homeowners to prepare. His advice is to ''lock down that fixed-rate mortgage.''

As for the hedging vehicles being offered, he has doubts about their utility for most current and prospective homeowners. ''The adviser who would sell them won't be able to understand them,'' he said. ''They're the kind of thing you see pushed at the top of a market.''

For someone considering buying a home now, ''the smart thing to do is rent,'' he said.

''It probably does not make sense for someone who owns a home and plans to stay there to sell it and rent it back,'' he added. ''But what probably makes sense is for that first-time homebuyer or guy planning to retire to Florida to rent instead of buy.''



URL: http://www.nytimes.com