It's been 18 months now that you can, through the Chicago Mercantile Exchange, trade futures based on house price indexes for each of the top ten largest US cities. You can sell futures, buy puts or sell calls all designed to hedge losses that might be occurring on the value of your home.
Each of these futures contracts are trading on an ongoing basis-- for example, the house price index in Los Angeles is trading with the underlying assumption of an 11.5% drop over the next two years. With that index trading at $57,000, one could hedge the price drop of a $3.0 million home there by selling 52 contracts. You would put up approx. $120,000 on that hedge. The contracts would not cover the full 11.5% drop if it occurred, but would help the participant avoid the full loss.
Please be sure that you and your clients understand that these strategies can go against you such that you can lose money by being half right-- for example, if the LA markedt only dropped 5% in the two year period, it would end up costing more than if you never tried to hedge the dropping home value. This strategy is detailed in the December 10th, 2007 Forbes Magazine, p. 154, Protect Your Home.
As professional Realtors it is important for all of us, or some of us, to be aware of these financing alternatives and to be able to discuss them when the topic comes up... just be careful.
Monday, December 17, 2007
Subscribe to:
Posts (Atom)
