brainsmile

How to Hedge The Value Of Your Home

http://www.washingtonpost.com/wp-dyn...2004Dec17.html

Could you lock in your home's current value and be protected against future real estate market declines? Could you, in the lingo of the financial markets, hedge your home-equity holdings?

Such questions are highly relevant for those who wonder how long the housing-appreciation boom can last. How long can the average American house gain more than 1 percent a month in value, as it did in the past 12 months, or gain close to 50 percent in value over five years?

A possible answer was proposed in a late November filing with the Securities and Exchange Commission. A company called Macro Securities Research LLC expects to begin offering a new financial instrument in the coming months that will permit anyone to hedge their bets on housing-price changes in real estate markets across the country.

Though the underlying structure of the securities is complex, the bottom line for homeowners is this: If you are worried that your equity might decline, you will be able to go to your stockbroker and buy a hedge security that protects you from loss.

If you think it's likely that housing prices will fall in your area over a period of time, you could buy what the SEC filing describes as a "Down-Macro" that insulates you against equity loss. Think of it as similar to taking what's known as a short position on a stock. You are betting that an asset, in this case your house, will sell for less at some time in the future.

If the system outlined by Macro to the SEC works as planned, your short, or down, position will be matched with an investor, probably a big institution such as an insurance company or pension fund, that buys a "long" or "Up-Macro" position for its own portfolio-hedging reasons.

The ambitious Macro concept for a new market of housing price-indexed financial instruments might not be credible without its developers' sterling credentials. Two of the co-founders, Robert J. Shiller and Allan N. Weiss, helped pioneer the system of local housing price indexes used by the federal government, investors Fannie Mae and Freddie Mac, and many large mortgage and housing firms to gauge property value changes in hundreds of localities. Their firm, Case Shiller Weiss Inc. of Cambridge, Mass., also created the CASA automated property valuation system that many lenders and banks use to estimate home real estate values online, at far less expense than conventional appraisals.

Shiller, an economist at Yale University, is well known for another reason. He wrote the book "Irrational Exuberance," which warned about the speculative bubble in the stock market preceding the market bust of 2001-02.

Macro's chief operating officer and co-founder, Sam . Masucci, is a Wall Street hedge fund and mortgage securities veteran who helped develop the "shared appreciation" home mortgage in Britain.

In an interview, Masucci said the creation of housing-price-indexed securities, not only Macros but futures contract trading programs, should spark a wave of innovative, housing-related financial products for consumers and investors. Among those being planned are home-equity insurance policies and a new breed of mortgages that carry discounted interest rates because the lender's risk of loss on the property is hedged in the futures market.

The Chicago Mercantile Exchange confirmed this month that it is working with Macro Securities to develop housing-price-indexed futures trading programs for institutional and individual investors. The Macro securities now in registration with the SEC are expected to trade on the American Stock Exchange.

Equity protection is not a new idea. Capital-market experts for years have worked on ways to tap into the nation's largest, relatively illiquid asset -- Americans' estimated $22 trillion in home real estate holdings. But the development of accurate, widely accepted housing price indexes covering hundreds of markets, down to the Zip code level, has opened the door.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.

http://www.forbes.com/services/2005/...0620rates.html

Hedge Funds And The Real Estate Bubble
Liz Moyer, 06.20.05, 6:30 PM ET


NEW YORK - Are hedge funds fueling a housing bubble? It may not be the first thing that comes to mind, but an increasing number of economists are seeing a connection.

Though the Federal Reserve chairman has yet to come right out and say it, economists are adding hedge fund activity to the list of theories as to why long-term interest rates have baffled markets by remaining near historic lows--failing to rise in lock-step with short-term rate hikes.

The low rates have encouraged continued buying activity in the housing markets, to the point were practically everyone is talking about a real estate bubble.

Economists are pointing at hedge funds as a contributing factor, saying heavy demand is driving yields down. "If there is a lot of money doing that, it could actually affect the market," says Marshall Blume, from the University of Pennsylvania's Wharton School of Business, in an academic research note. "If hedge funds are helping to keep interest rates low in defiance of the Fed's efforts, they are contributing to the housing boom that some believe is becoming a speculative bubble."

Alan Greenspan has called the apparent disconnect between short- and long-term rates a "conundrum." Despite eight increases in the Federal Funds rate since last June, the yield on the benchmark ten-year Treasury has remained at low levels. It fell from 4.38% in January 2004 to 4.24% in December and continued to fall this year, touching 3.89% on June 2 before inching back up to close at 4.11% Monday.

Greenspan has addressed the risks associated with the explosion of the hedge fund industry in the last couple of years, recently telling banks to keep a vigilant eye on credit standards with regards to their dealings with hedge funds.

But in addressing the issue of short- versus long-term rates--what economists call the flattening of the yield curve--the Fed chairman has not put hedge funds in the vanguard. Instead, his theories put foreign investment, pension funds, the increasingly intertwined global economy and worries of a softening economy at the front of the list.

Private economists say it is hard to ignore the influences of hedge funds, however. Once a marginal business involving only the wealthy elite, hedge funds have attracted a broad audience of not-so-rich individuals and even pensions and endowments seeking better returns on their money than the stock and money markets have produced in recent years.

The problem is that the increased number of hedge funds means there are many more managers following like strategies. "There are a limited number of arbitrage opportunities," says Richard Marston, a professor of finance and economics at Wharton. "It's not herd mentality so much as everyone is looking for good ideas, and they often come up with the same ideas."

Simply put, Blume says in a telephone interview, "When you throw a lot of money at the financial markets, you do distort them."

While the yield on the ten-year note has held around 4%, the yield on the two-year bond has risen steadily, from 1.94% in January 2004 to 3.72% as of June 17. The narrowing spread has erased much of the advantage short-sellers of the ten-year would have had.

Richard DeKaser, the chief economist at Cleveland's National City (nyse: NCC - news - people ) said data from the Commodities Futures Trading Commission suggests there could be a connection between speculative interest in the bond market and the direction of interest rates.

Using data on long positions in the ten-year bond, DeKaser calculated the short positions for non-commercial and non-reporting traders. The latter category would include hedge funds. Short positions--those who bet against a rise--in the ten-year Treasury began piling up in September 2003 and reached more than 621,000 short contracts the week of March 22. DeKaser says that's possibly an all-time high. In comparison, as recently as December 28, there were 85,489 short contracts, and last week there were 153,560.

What does this mean? Investors were betting that bond prices would fall (and subsequently rates would rise), and thus that they could make a profit by selling short. But if the reverse happens and prices rise, they'd have to buy. Enough buying could drive up bond prices and force interest rates down.

In March, as the short contracts were piling up, the ten-year yield jumped from 4.38% to 4.63%.

But from March to May there was a sharp drop-off in these short ten-year bond contracts by speculative traders, by DeKaser's calculations. That would coincide roughly with the downgrades of the debt of General Motors (nyse: GM - news - people ) and Ford Motor (nyse: F - news - people ), two events that roiled the bond markets in early May. The yield on the ten-year went from 4.63% on March 22 to 4.0% on May 31.

There was a sharp pick-up in short contracts at the beginning of June. On May 31, there were 8,517 short contracts from speculative traders. That rose to 89,000 the next week and 153,000 last week. Meanwhile the yield on the ten-year has climbed from 4% to 4.11% in the same period.

"I do believe that short-term speculative traders have had a significant influence on interest rates," DeKaser said in a telephone interview.

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