great question! I’m bookmarking this one and will try to do some research on it.

great question! I’m bookmarking this one and will try to do some research on it.

It is a good question however what happens if the market goes down but it goes down slowly. Then you have a depreciating product and then lose out on the futures. I am an engineer and a realtor. I know a few things but do not know alot of things. I believe that investing in futures is a good way to lose money if you are novice at it. I am not saying your idea is without merit. To be simplistic you are kind of performing a straddle of sorts. Not a bad idea but not without risk.

Just be careful.

SD Realtor

The problem is that based on today’s futures prices on the CME, The November 2011 contract for San Diego prices is priced at 16.5% below todays prices.

To make money you would need to bet on a further downside than that. We already have about 12% off nominal prices. The projection would make it a total of about 30% decline in nominal prices. Add to that the effects of inflation from 2005 to 2011 (another 18-21% or so) and you get a 50% decline in real home prices.

I think it’s quite risky to bet on more than a 50% real price decline.

Now, as for hedging against a purchase, the problem is similar. Since the futures market is pricing in 16% declines over the next 4 years. Trying to produce a product that ensures 0% decline in that kind of environment would be quite expensive.

The problem is that based on today’s futures prices on the CME, The November 2011 contract for San Diego prices is priced at 16.5% below todays prices.

To make money you would need to bet on a further downside than that. We already have about 12% off nominal prices. The projection would make it a total of about 30% decline in nominal prices. Add to that the effects of inflation from 2005 to 2011 (another 18-21% or so) and you get a 50% decline in real home prices.

I think it’s quite risky to bet on more than a 50% real price decline.

Now, as for hedging against a purchase, the problem is similar. Since the futures market is pricing in 16% declines over the next 4 years. Trying to produce a product that ensures 0% decline in that kind of environment would be quite expensive.

Maybe a lease with option to buy at a specific price would suit you.

Could someone please post details on the CME contracts? Some specific questions:

(1) URL to track dates and prices?

(2) If I expect prices to go down more than 16.5%, should I buy or sell the contract, i.e. which way round does it work?

(3) What are commissions and other expenses (market impact) to make a trade? What are margin requirements?

(4) Supposing I own a house outright now worth $1M (i.e. with no mortgage). Does the current 16.5% expectation mean I could sell my house, buy/sell some contracts, collect $165,000, rent for four years, and then receive enough money to be able to buy back an equivalent house at whatever its price is in 2011?

If the above scenario is based on a misunderstanding, which part is impossible?

(5) If the scenario is possible, what would the transaction and carrying costs be? I understand abour RE commissions on the sale and purchase. What would be the borrowing costs be to hold on to the CME contract for four years?