FRONT LINES: Economy

BY LAWRENCE YUN

Hedge your housing bets

In case you missed it in the national media, the Chicago Board Options Exchange in March announced the launch of housing futures contracts using NAR’s monthly existing-home sales data.

The program gives investors a vehicle for participating in the $20 trillion U.S. real estate market through purchase of contracts whose yields are based on the direction of home prices, nationally or regionally.

The contracts are a feather in the cap for REALTORS® because they showcase the confidence of the Chicago Board in NAR’s EHS data.

More important, though, the program gives anyone with a stake in real estate—practitioners, lenders, home builders, even home owners—a chance to enhance or protect their real estate investments through the same hedging strategies available to Wall Street investors.

The contracts work like this: Suppose a home owner in Omaha, where prices are rising at a steady but modest clip, wants to tap faster appreciation in hot markets and believes Los Angeles is a good bet for future rising prices. This home owner, in a transaction known as buying long, might buy a contract anticipating rising Los Angeles home prices. It would be like buying Microsoft stock on the belief that the company is undervalued.

At the same time, a home owner in Los Angeles or a mortgage lender with heavy exposure in the city wants to minimize the risk of Los Angeles prices leveling out or declining. Each might buy a contract anticipating that price trend in a transaction known as buying short.

If prices were to decline, those betting short would gain from their futures contract, helping to offset the loss of appreciation. The market as a whole would benefit, too, since the compensating return to investors would help cushion the impact of declining prices in Los Angeles on the economy.

With this market largely untested, it’s hard to predict how popular the program will become with practitioners, builders, lenders, and other professionals with exposure to the ups and downs of real estate activity, as well as investors and home owners. But the potential is there for many to benefit as they deploy the same kind of risk management used in other asset classes to what’s arguably one of the most integral markets in the United States: housing.

Find current economic data at REALTOR.org/research.

Yun is managing director of quantitative research for the NATIONAL ASSOCIATION OF REALTORS®.

Second homes
NAR’s latest analysis of the second-home trend, using data collected by lenders under the Home Mortgage Disclosure Act, shows a 65 percentage point increase in mortgages taken out for second homes between 2000 and 2004.

Business Confidence
Sellers stepping up Sales are expected to stay relatively solid, with more sellers entering the market in the coming months. Buyer traffic will cool a little, practitioners believe. Practitioner confidence was surveyed in March and looks ahead six months.



Results are based on 429 responses to 3,000 surveys sent to large and small real estate offices. The survey asks practitioners to indicate whether conditions are strong (100 points), moderate (50), or weak (0). Responses are averaged to derive results.

Home Sales
Existing-home sales rebound Sales of existing homes rose in February following five months of decline, indicating a stabilizing market. Single-family, town home, condominium, and co-op sales increased 5.2 percent to a seasonally adjusted annual rate of 6.91 million units from an upwardly revised pace of 6.57 million units* in January.
*Revised from a figure reported in the April issue.



April 1 Pending Home Sales Index: 117.7 The PHSI, based on signed contracts for existing homes, is an indicator of home sales expected to close over the following two months. An index of 100 is equal to the average level of contract activity during 2001, the benchmark year.

Find current economic data at REALTOR.org/research.