Home Futures Are Hedge Tool

At the 2006 Predictive Methods Conference here, Robert J. Shiller, chief economist and co-founder of Macromarkets, predicted a decline in housing prices and called for more historic data to create a better method for detecting future home prices.

In fact, he and executives from a consortium of firms believe that the best way to predict future home prices is to create a market that will predict them. Macromarkets, together with the Chicago Mercantile Exchange, Standard & Poors and Fiserv, primarily through its Case Shiller Weis subsidiary, began trading such home price futures for 10 major U.S. markets about a year ago. While Mr. Shiller pointed out that the historical data over the past year is not sufficient to make any statements about future home prices, he is confident that as the market matures and more liquidity flows into it, solid predictions of future home prices will result.

But will investors embrace home price futures? Mr. Shiller believes they will as they can be a good hedge for investors that are overexposed in other areas. He pointed to investments made in oil over the past 20 years and noted that while the price of oil has risen and fallen over time, investors that took a long position in oil price futures saw returns on par with the stock market. Mr. Shiller expects investors in home price futures to do as well, even though he expects to see some home prices fall in the future.

According to Mr. Shiller, housing prices don't always go up and a good investment may depend more upon area rental rates than the value of the home. "Trends are what dominate most people's thinking when they forecast home prices, but in real terms, homes have not appreciated that much. Home prices don't always go up."

Mr. Shiller based his comments on the Standard & Poor's/Case-Shiller Home Price Index that he helped develop. In looking back over home prices for the past 100 years and making adjustments to normalize the date, Mr. Shiller found that home prices were extraordinarily flat until about 2000 when they trended sharply upward, from an index of 100 to nearly 200 today.

He said that looking at home prices relative to area rental rates is important because while the price of homes is subject to investor speculation in the market, rents more accurately reflect the cost of housing as a service in a given market. Up until 2000, rents and home prices were strongly correlated, but after that time, home prices rose sharply but rents did not.

Mr. Shiller worries about this and suggests that home price corrections are likely. In general, data that Mr. Shiller shared indicate that home prices don't correlate well with anything other than rent. While the cost of construction and building material has increased somewhat over the past 100 years, the cost of a typical home, in adjusted dollars, has remained the same up until 2000. There is only one other time in recent history when the prices of home have trended upward, right after WWII.

"There was the effect of the baby boom, the soldiers returning from the war and the fact that Roosevelt had shut down the construction industry," he said. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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