T Nation

Housing Bubble Bets


Now you can invest in (or short) the housing market based on some new S&P indexes... Interesting stuff -- especially the possibility of regional plays.

S&P Will Launch
Indexes to Track
Housing Prices
March 23, 2006; Page D2

Investors who think the housing bubble is about to burst will soon be able to bet not only on when it will happen, but where.

Standard & Poor's, a unit of McGraw-Hill Cos., is rolling out 10 indexes that will track housing prices in various regions of the U.S., as well as a composite index. The indexes, which plan to launch in April, will serve as the basis for futures and options contracts that will trade on the Chicago Mercantile Exchange.

The contracts will allow investors to go long or short on a specific housing market -- that is, bet on it rising or falling in value.

Dubbed the S&P/Case-Shiller Metro Area Home Price Indices, the 10 cities comprise Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, D.C.

The composite index will be weighted, with New York, for instance, carrying more influence than Miami because the Big Apple has higher housing values and more homes.

"Obviously all this talk about housing bubbles is going to enhance interest in the product," says David Blitzer, chairman of Standard & Poor's Index Committee. But he adds the indexes are also meant to serve as a reliable source of information about what is many consumers' most valuable asset.

The indexes will use calculation techniques developed by economics professors Karl Case and Robert Shiller, such as repeat-sales calculations and a database comprised of home sales from a variety of sources, including lenders, multiple-listing services and public records. Data will be gathered continuously, and the indexes will be updated and published monthly, Standard & Poor's said.

Futures contracts obligate an investor to buy or sell an underlying asset on a certain expiration date at a fixed price, unless the investor makes an offsetting trade beforehand. Options grant the right, but not the obligation, to buy or sell an underlying asset at a fixed price anytime before expiration.

Write to Karen Talley at karen.talley@dowjones.com


sweet. My money is on CA busting in a year to two years!


Is it just me or is this crying out for even more corruption than Corporate Exchanges and Futures Markets see? Could you legally deny someone the right to buy/own/develop property if they participate in the exchange? And if it's not tied to any actual valuation of merchandise/ownership what stops it from completely whimsical fluctuations?


I was partial to the idea of localized housing market bubbles, but given these new indexes I think more generalized bubbles are inevitable now. People just can't leave well enough alone.

I agree with haney, we are very much due for the california bubble to burst - I think it will affect southern california moreso than northern california given the fact that the tech bubble burst a few years back and affected home prices there. Surely another earthquake would help the process and probably deflate prices even further as a number of out-of-staters would move back home as they did after the Northridge quake.

Orange County home prices would likely go into the can with or without the bursting of the bubble given the fact that average debt there is so high from the borrowing binge of the last half decade of low interest rates and most of the business there is service-based, and therefore quite sensitive to any economic slowdown.


Well, the numbers that were out a few hours ago point to more growth, at least on a global (Federal) level.

That doesn't mean there isn't localized contraction -- over here in the Bay Area the market has stabilized and everybody fully expects it to shrink next year, assuming the Fed Reserve continues to increase interest rates.

Basically, we currently have a power struggle at the highest economic levels: on one side, the brokers and the larger banks, who are lobbying for the Fed Reserve to stop hiking the rate -- and sustain the growth, even at the cost of generalized inflation -- on the other, the Reserve, the smaller banks and mortgage lenders and the fixed-income guys (e.g. Bonds) that want the rate to keep hiking to curb inflation.

Short-term, I believe that the Reserve should stop increasing the rate, not because I'm siding with the big banks, but because I believe that it has no upside -- increasing it quickly will not stop inflation -- but a big downside -- it might cause the bubble to burst and a lot of people to go into bankruptcy.

On the other hand, long-term, we have to realize that if the rate does not increase, it will get to a point where bankruptcies will be inevitable anyway, and the smaller the bubble and the more controlled deflation at the time, the better. So the rates will have to increase long-term.

So, personally I'd like to see slightly slower rate hikes, maybe half or four times slower than now...

Problem is, today's news might prompt the Fed Reserve to hike it again at the next meeting, and we might have a nasty surprise in CA if that happens. Hopefully Ditech and Wells Fargo -- biggest lenders over here in the Bay Area -- will be able to cushion it a bit.

I therefore would not "bet" on the SF market right now, since it should have little movement -- volatility is low, so option prices should be low too, but a straddle would be way too expensive and a put or a call would be way too risky for the potential returns...

There's always credit spreads, but that's only for short-term investors who really know what they're doing.

The Las Vegas market, OTOH, is attractive. Maybe I'll open a few calls there myself... But don't tell anyone or the ask price will skyrocket and there's always a few dummies that will cover it.


If I understand what you're saying, why do you believe having a Futures and Options market on House prices will affect the housing market itself? Considering how expensive to make a dent on the market is (it would involve buying or selling thousands of houses), I sincerely doubt anyone will play the market that way...

On the contrary: I believe having this will help control the market since there will be millions investing in statistical analysis and forecasting, which helps everybody make better decisions to keep the market stable and predictable... Less volatility = cheaper options... Everybody's happy.

The potential for insider trading from Realtors, on the other hand, is enormous, however that doesn't affect the housing market, it affects the options market... :slight_smile:


My feeling is that futures and options market will be used as a guage for markets not represented by those which are not actually taken into account in the market itself.

The fluctuations in prices that result from economic flux, domestic and international migration patterns and other phenomena that are largely regionally localized to the metropolitan areas represented in the proposed futures and options market could potentially then be generalized to adjoining areas, thereby affecting the prices seen in these areas and potentially causing what could have been a localized housing bubble to have an impact upon a more geographically diverse market, or set thereof, than would have otherwise been the case.

I agree with you that this market may well, over time, serve to stabilize prices as forcasting is improved, however my greatest concern is its impact in the near term.

I also have the concern that the futures and options may well soon become akin to those offered for agricultural goods - which are not very significantly affected by anything short of those events that actually have a significant impact upon the supply or quality of wheat, etc. But I suppose this would constitute a stability of sorts.

I do wholeheartedly agree with you that the opportunity for insider trading on the part of agents is huge, I would not be the least supprised to see price setting either.

I just think this whole thing is a knee-jerk reaction to the real estate climate of the past decade or so. But, I also am partial to the proposition that we are not likely to see much price growth in housing market for the next one or two decades.


The new numbers look to me like a little blip -- especially with increasing sales but decreasing prices. I think some sellers are foreseeing a flood of offerings in the spring. We'll see what happens -- lots of noise in month-to-month numbers...


With the number of interest-only loans and adjustable rate loans due to convert this year, I think we will see a flood of biblical propotions in terms of offerings. With the number of interest only loans, GPM's, ARM's and option ARM's taken out in the past couple years with the low prime rates the picture probably won't get any prettier for a while either.


The margin on one futures contract on the housing index will probably be more than most people are willing to part with. Add the fact that it's leveraged, and most people won't touch the futures, other than actual real estate investors.

Most home owners will end up buying options, which makes the option sellers happy because over 90% of them expire worthless.

It's just another product for the futures exchanges to try to get more transaction fees to make more money.


What exactly would it mean for this "housing bubble" to "burst?"


Hopefully, it means I get my first home cheap.


Bubbles - be they in the stock market or, in this case, the housing market - result when there is a rush of speculative capital into a particular sector/market/etc. which results in the overvaluing of the stocks or properties.

The formation of such bubbles are often the product of a herd mentality amongst less sophistocated investors who see the success of others' investment in the sector and follow suit in hopes of profiting themselves. Favorable punditry also helps feed the herd behavior.

A bubble will burst when a critical mass of investors realize the overvaluation of the holdings in question. The bursting of the housing market bubble is likely to have more to do with other factors though, in my mind mortgage default may become chief amongst these factors.


The UK faces something of an issue with housing, where a first time buyer hause is at the average price of ?150,000 (about $230k US, give or take).

The main difference in the UK is that we are a house based economy (far more of our money is in our property, not disposable, and we have very little space to build on, so demand will always be greater than supply (there is a shortfall of some 30000 houses/year.

We have had this situation since the 80's.

The only thing that will stop this charge would be a massive shift in government policy, which will never happen. Interest rates remain relatively low (for us, a bit higher than yours). What will slow it and cause problems is that lack of new buyers due to cost, so there wont be a feed up the chain.


I don't think you'll see a burst so much as a prolonged drop in price. Some areas are overextended. Manhattan, for example, is way overextended.

Real Estate, much like the stock market, rewards the patient investor. The house you buy today may drop next year and stay down for a few years, or it may not. I would guess that if you hold on to that house long enough, 10-15 years, you will do well.

I've never lost money on a real estate deal yet but sometimes you have to wait. It's the times you cannot that cause the headaches. I don't think the US has ever really seen a massive devaluation of real estate.


... which is already starting, according to some news I read today.

Oh yeah... But Manhattan has many unique problems. The houses tend to fall on the extremes: either really bad, old ones or really posh, modern ones, much because of the demographic: people who live in Manhattan are either relatively poor or affluent young couples...

Not true. Los Angeles during the late 80s and early 90s -- look it up: Massive devaluation that caused a flurry of people to just walk out of their homes and declare bankrupcy.


The situation in the UK is quite similar to the US. Actually, it never seems to amaze me how much the UK's and the US' economies track with each other.

The chart above is almost identical -- including in timing -- to LA's housing market.


If they don't get the indexes up and running soon, perhaps all the fun will be betting when the markets will recover...

March 24, 2006 12:56 p.m.

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If the U.S. housing market is not a bubble bursting, it is at least a boom deflating, as new data made clear today.

New home sales sank 10.5% last month, the Commerce Department said, the biggest decline since April 1997 and far bigger than economists expected. The seasonally adjusted annualized rate of home sales was the slowest in nearly two years. Sales have fallen in four of the past six months. Meanwhile, the number of unsold homes on the market rose more than 4%, representing a 6.3-month supply, the highest in more than a decade. Unsurprisingly for anyone with a vague knowledge of basic economic principles, rising supply and falling demand means new-home prices are falling. The median price for a new home fell for the fourth straight month to $230,400, nearly 3% lower than a year ago. It was the first time prices have fallen on a year-over-year basis since December 2003.

On the brighter side, new-home sales make up less than 14% of the total housing market; pre-owned homes make up the rest, and they rose solidly last month. But that's not much of a comfort; new-home sales are typically considered a leading indicator of housing trends, while used-home sales are lagging. And last month's strength in used-home sales was likely the aftereffect of January's temporarily warm weather and lower mortgage rates.

Some observers worry that rising mortgage rates will hurt the housing market; they certainly won't help. The Federal Reserve is almost certain to raise short-term borrowing costs next week and could raise at least once more by May. That has no direct impact on 30-year mortgage rates, but could possibly make adjustable-rate and more exotic flavors of mortgage more expensive.

But one reason housing is slowing down already, even with borrowing rates still relatively low, is that many houses have simply become unaffordable to many buyers. A strong economy and job market will keep some buyers in the game, but a slowdown in housing is likely to hurt the economy. The only question at this point, it seems, is whether the housing slowdown will be gentle or screeching. Most economists are in the gentle camp, but a few are not.

One of those self-described "uber-bears" on housing, Ian Shepherdson of High Frequency Economics, called today's report "awful, but not yet a convincing collapse." Comforting.


I'll take your word on Los Angeles.

How long did LA take to recover after that period? Did it? I would assume specultors came in following that period.

What's your prediction on housing?


There were a lot of local severe downturns in the late 80s early 90s -- that stat on "no prolonged drop in price" aggregates the entire U.S. market, but that wouldn't have helped you in LA, San Diego, Boston, etc. at that time.