– FormerSanDiegan: I agree that vanilla futures can at best guarantee 17% decline, even ignoring fees, etc. Of course, this problem would be somewhat solved if there were a bullish bozo who is willing to sell it high.
– Duck: CME housing future options are pit traded and my broker (IB) doesn’t seem to support it, so I guess average Joe is not supposed to deal with this. Also getting a “fair” price could be a headache, although we never ask that question for everyday insurance products as far as they are “affordable”.
REX & Co. is really interesting — they are in a sense taking some share of your house and, even better, that share comes out as cash. As XBoxBoy mentioned, we need to hold the house for 5 years, but on a flip side, after 5 years we can settle the deal with them without an actual sale — just getting an “independent” appraisal will do the job.
As a quick calculation without tax implications, suppose I get into the REX agreement for a 1 million house with 50% profit/loss sharing. They will give me 140k according to the sample calculation on their website, which will give me around 40k over 5 years risk-free.
If the house value tanks down 20% in 5 years (rough interpolation from the housing futures prices), then the net loss becomes 200k * 50% (REX agreement) – 40k (interests) = 60k. Thus 2/3 of the loss is hedged away.
I believe a better strategy could be possible. Also, if I don’t have to sell within 5 years and if the market stays flat for a couple years, I can hedge more by just waiting, thanks to interests accrued on that 140k.
So what’s the catch? Obviously I should read fine prints, but the general approach looks very promising to me, who just wants to raise the family without losing big bucks.
