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If anybody makes a killing on the sale of your home, it probably will be the Wall Street wizards who got the housing market into a mess in the first place.
Recently the Chicago Mercantile Exchange began offering futures and options based on the value of America's homes. The basic idea of these products is to make it possible to bet on the direction of home prices. The hope they offered was that a homeowner could soften the blow of falling home prices.
But while the field is open to financial speculators, it's closed to you. Two reasons: The ante for getting into the game is prohibitively high; and the easy money betting against housing likely already has been made.
"It's like trying to buy fire insurance and there's smoke coming out of the top floor," says Fritz Siebel, a broker specializing in housing with TFS Derivatives. "Whereas last year it would have been cheap."
Trading on the Merc last week was predicting that property values in 10 major metropolitan areas will bottom out two years from now with prices down an average of 10.9%. Contracts due in November 2011 predict a plunge in home prices in San Francisco of 25.9%. In Miami, traders are forecasting a tumble of 27.9%.
To make money, you have to believe those predictions are either too sunny or too dire.
Rather than looking at options that are already down, home-hedgers should look elsewhere to profit from the nation's misery. iShares FTSE Nareit Residential Index ETF (REZ, news, msgs), which invests in apartment buildings, is up 10.7% in the last month, as of Oct. 11.
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A short position in iShares Dow Jones U.S. Home Construction (ITB, news, msgs) would have delivered gains of 25.8% in the last three months. SPDR S&P Homebuilders (XHB, news, msgs) is down 37.2% this year, which would be a gain for short sellers.
Short story
Short selling, or borrowing a security and selling it in the hopes of buying it back later at a lower price, is too risky for most investors, but it's tame in comparison with futures and options. Positions are settled in cash, so although you might have to put down only 2% to 4% of the face value of a $45,000 contract, you have to hold enough in your account to meet potential losses.If you have $25,000 on account with Siebel, he says: "You could get a couple of contracts traded. You can do something with that, albeit small." A Merc spokeswoman says developers, builders and other real-estate professionals are most likely to trade its products.
The Merc began trading home-price derivatives in May of last year, and the market is still tiny, with about 20 contracts trading on the average day. Contracts are based on the S&P Case/Shiller Home Price indices for 10 major cities, including New York, Washington, Chicago and Los Angeles, and the composite of all 10 markets.
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