fixing the housing problem by creating a derivatives market for homes.

Discussion in 'Economics' started by KINGOFSHORTS, Nov 16, 2011.

  1. Contracts are 5 year terms minimum

    American style contracts.

    This would allow Americans to hedge against house price risk.

    This would bring mobility back to americans.

    For example Joe Six pack buys McMansion for 450K dollars, he can then buy 1 McMansion ATM put with a strike of 450K

    Joe six pack would feel happy about his purchase and more secure.

    If the value of his house drops to 375 he can sell to close the McMansion put and take the cash difference, or exercise the contract and put the house on the seller of the contract. (terms 30 days)

    This would be great for Joe because if he has to relocate and the housing market plummets, he wont be stuck he can just exercise the contract and move to the new job.

    A call contract would be of real use also for renters, what if Joe Six pack chooses not to rent in his new location after exercising his long put contract. Well he can buy an ATM call contract on a McMansion.

    Joe hedges against missing out on a house price runup and gets the flexibilty of renting in the mean time to see if he likes his new job and location. And with the long call option Joe limits his risk of losses.

    Joe can also buy a home and sell a OTM call option (covered calls) on his house and collect a premium and reduce his cost basis over time.
    IF he feels neutral to slightly bullish on future home prices.

    This will help stabilize the markets and provide Americans more options when purchasing a home and give them many ways to protect themselves from adverse house price movements.
  2. swag


    aren't there housing futures on CME? I also recall Case-Shiller had some type of tradable security a couple years back, saw them debut it on CNBC.
  3. Your talking about the CSI but that would not be appropriate for this use.
  4. I don't see the value in this.

    The first problem that needs fixing is to get taxpayers out of the deferred-subsidy game WRT mortgages. IE, kill Fannie/Freddie and every other "market making" entity that lives in the mortgage space and has an implied (or stronger) taxpayer back stop.

    Once that distortion is out of the picture, "normal" residential property values will return to their historical low-volatility pricing pattern.
  5. I see the biggest problem here is that what you're insuring with the put is not a fungible product.