Home owner’s *price* insurance

[not-so-average-joe]

Dear All,

Although reading better-educated posts here gives me some energy to hold on, I am really getting tired of renting day after day. Now what if I buy now and hedge the downfall till 2011 by buying a futures contract for San Diego CSI at CME? Not that I really did the math for fees and spread, but isn’t it a (close-to-) viable option to buy essentially at 2011 price?

Or why isn’t there any insurance product for mass market based on CME CSI housing futures, which will be really great for novices like me? If I were Paulson, I would spend 100 billions to develop such a product and entice future buyers rather than bailing Citi out a big time.

Any thoughts here?

[wantobuy]

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

[wantobuy]

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

[wantobuy]

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

[SD Realtor]

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

[(former)FormerSanDiegan]

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.

[cantab]

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?

[(former)FormerSanDiegan]

cantab –

Here is the CME site:
http://www.cme.com/trading/dta/del/product_list.html?ProductType=hng

Click on San Diego to see SD pricing.

NOV 2007 is 224.60
As of yesterday, the pricing for NOV 2011 was 187.00
This is the price today for NOV 2011 Option.
To make money the price of that option has to go up or down. For example, the price today for Nov 2011 is 187. Suppose the news gets worse and the market anticipates more down side and in a few months that NOV 2011 price goes down to 160. If you shorted this, you could get out and make money.

The problem with these is that the market is anticipating the 16% decline. You can only make money or hedge if the results are considerably better or worse than this market anticipates.

The best time to make those kinds of plays are at market inflection points (turn-around in conditions). We had a clearyl defined inflection starting about 2005. If one had been able to short the housing futures at that point one could have made some dough.
In my opinion the next opportunities will be when the market anticipates a rebound that does not happen.

[Duck]

I have been unable to find an option pricing chain for real estate at the CME although I believe one exists if you are a CME member or have a broker who is. You should be able to buy 2011 puts in 5 point increments from today’s current Case Shiller price, and hedge that way. The put gives you the right to sell at today’s prices for whatever premium they charge.

BTW, Shiller has been so visible recently because he licenses his data and in addition to the futures and options market he is trying to work with insurers who would do the hedging for you and issue “equity insurance” of sorts.

I don’t know much about futures/options theory, but I can’t believe this is a very efficient market right now because it’s so thinly traded.

BTW there is an outfit called REX and Co. that offers a deal where they will give you free use of some of your current equity in exchange for a percentage of the gain/loss on your home when you sell. It’s not a loan. It seems like it might be a good hedge if you are selling in the next 2-4 years and have a lot of equity.

[XBoxBoy]

Not positive about this, but looks like the fine print in the Rex & Co calculator says you have to have the agreement in place for five years.

[not-so-average-joe]

Thank you all for many insightful comments.

– 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.

[not-so-average-joe]

Thank you all for many insightful comments.

– 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.

[not-so-average-joe]

Thank you all for many insightful comments.

– 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.

[XBoxBoy]

Not positive about this, but looks like the fine print in the Rex & Co calculator says you have to have the agreement in place for five years.

[XBoxBoy]

Not positive about this, but looks like the fine print in the Rex & Co calculator says you have to have the agreement in place for five years.

[Duck]

I have been unable to find an option pricing chain for real estate at the CME although I believe one exists if you are a CME member or have a broker who is. You should be able to buy 2011 puts in 5 point increments from today’s current Case Shiller price, and hedge that way. The put gives you the right to sell at today’s prices for whatever premium they charge.

BTW, Shiller has been so visible recently because he licenses his data and in addition to the futures and options market he is trying to work with insurers who would do the hedging for you and issue “equity insurance” of sorts.

I don’t know much about futures/options theory, but I can’t believe this is a very efficient market right now because it’s so thinly traded.

BTW there is an outfit called REX and Co. that offers a deal where they will give you free use of some of your current equity in exchange for a percentage of the gain/loss on your home when you sell. It’s not a loan. It seems like it might be a good hedge if you are selling in the next 2-4 years and have a lot of equity.

[Duck]

I have been unable to find an option pricing chain for real estate at the CME although I believe one exists if you are a CME member or have a broker who is. You should be able to buy 2011 puts in 5 point increments from today’s current Case Shiller price, and hedge that way. The put gives you the right to sell at today’s prices for whatever premium they charge.

BTW, Shiller has been so visible recently because he licenses his data and in addition to the futures and options market he is trying to work with insurers who would do the hedging for you and issue “equity insurance” of sorts.

I don’t know much about futures/options theory, but I can’t believe this is a very efficient market right now because it’s so thinly traded.

BTW there is an outfit called REX and Co. that offers a deal where they will give you free use of some of your current equity in exchange for a percentage of the gain/loss on your home when you sell. It’s not a loan. It seems like it might be a good hedge if you are selling in the next 2-4 years and have a lot of equity.

[(former)FormerSanDiegan]

cantab –

Here is the CME site:
http://www.cme.com/trading/dta/del/product_list.html?ProductType=hng

Click on San Diego to see SD pricing.

NOV 2007 is 224.60
As of yesterday, the pricing for NOV 2011 was 187.00
This is the price today for NOV 2011 Option.
To make money the price of that option has to go up or down. For example, the price today for Nov 2011 is 187. Suppose the news gets worse and the market anticipates more down side and in a few months that NOV 2011 price goes down to 160. If you shorted this, you could get out and make money.

The problem with these is that the market is anticipating the 16% decline. You can only make money or hedge if the results are considerably better or worse than this market anticipates.

The best time to make those kinds of plays are at market inflection points (turn-around in conditions). We had a clearyl defined inflection starting about 2005. If one had been able to short the housing futures at that point one could have made some dough.
In my opinion the next opportunities will be when the market anticipates a rebound that does not happen.

[(former)FormerSanDiegan]

cantab –

Here is the CME site:
http://www.cme.com/trading/dta/del/product_list.html?ProductType=hng

Click on San Diego to see SD pricing.

NOV 2007 is 224.60
As of yesterday, the pricing for NOV 2011 was 187.00
This is the price today for NOV 2011 Option.
To make money the price of that option has to go up or down. For example, the price today for Nov 2011 is 187. Suppose the news gets worse and the market anticipates more down side and in a few months that NOV 2011 price goes down to 160. If you shorted this, you could get out and make money.

The problem with these is that the market is anticipating the 16% decline. You can only make money or hedge if the results are considerably better or worse than this market anticipates.

The best time to make those kinds of plays are at market inflection points (turn-around in conditions). We had a clearyl defined inflection starting about 2005. If one had been able to short the housing futures at that point one could have made some dough.
In my opinion the next opportunities will be when the market anticipates a rebound that does not happen.

[cantab]

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?

[cantab]

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?

[(former)FormerSanDiegan]

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.

[(former)FormerSanDiegan]

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.

[SD Realtor]

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

[SD Realtor]

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

[sdduuuude]

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

[sdduuuude]

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

[sdduuuude]

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

[Author]

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