New exchange forecasts home prices New York market may drop in second quarter, data shows By Alistair Barr, MarketWatch Last Update: 6:57 PM ET June 8, 2005 ---------------------------------------------------------------------- SAN FRANCISCO (MarketWatch) -- Homeowners and prospective buyers worried about surging prices have a new place to go to check the pulse of real estate markets. HedgeStreet, an online derivatives exchange that opened last year, lets ordinary folk bet on the outcome of economic events and the price of things like currencies, gasoline and interest rates. Hedging and speculation like this used to be the exclusive domain of companies, investment banks and hedge funds. In May, the San Mateo, Calif.-based company introduced new derivative contracts based on the future median price of single-family homes in Chicago, Los Angeles, Miami, New York, San Diego and San Francisco, as published by the National Association of Realtors. Now that customers have begun trading, HedgeStreet has started compiling forecasts based on the price of the derivative contracts. The first forecasts - based on contracts linked to house prices at the end of the second quarter -- are in. "Prices on HedgeStreet become pretty interesting predictors of market consensus," Russell Andersson, co-founder of the company, said. "Participants are expressing their views on the future of housing markets and that's valuable information." HedgeStreet traders are betting that the median price of a single family home in New York will drop 1% to $431,010 during the second quarter, versus the first three months of 2005. Real estate markets in Los Angeles and San Diego are expected to continue their recent hot streaks, rising 6.2% and 4.1% respectively in the second quarter, HedgeStreet said. House prices in Miami, San Francisco and Chicago are also expected to rise, but not at such a brisk pace. Miami homes are forecast to appreciate by 3% to a median price of $325,175 in the second quarter, HedgeStreet said. The San Francisco market may climb 1.2%, while Chicago edges up 0.7%, the company added. The forecasts are based on bids in HedgeStreet's real estate markets on June 6. HedgeStreet said it plans to publish more forecasts in future.
There is also an "IG Index" in Britain.... I believe housing derivatives will be hot if they are offered on the better known exchanges like CME/eCBOT... http://www.economist.com/intelligentlife/wealth/displayStory.cfm?story_id=3908979 A life hedged about John Smutniak From Intelligent Life, Summer 2005, print edition -------------------------------------------------------------- How to protect yourself against volatile markets IF YOU feel unusually jittery about the economy, you have reason. Rising oil pricesâthey have been above $50 a barrel for much of this yearâbreed uncertainty. Meanwhile, record-high house prices in many countries are fostering worries of a house-price tumble. What is more, people are increasingly uneasy that their pensions are hostage to volatile bond- and stockmarkets. For a long time, banks and big companies have been able to protect themselves against such volatility, by using financial derivatives to hedge against swings in currencies, interest rates and commodity prices. Airlines, for example, use contracts to lock in fixed prices for jet fuel months before they use it. Banks use derivatives to dampen the effects of volatile interest rates. Some American and European cities have even used a form of insurance that pays out when it snows more than expected, so that the effects of violent weather do not break their budget. Until now such financial engineering has mostly been off-limits to the little guy. Yet last year, HedgeStreet, a new online derivatives exchange based in California and backed by venture capital, launched a financial exchange that allows ordinary people to insure themselves against swings in prices of things that affect their everyday life. Some of the most popular contracts are likely to be for derivatives based on the prices of residential property in six American cities including San Francisco, Chicago and New York, and for mortgage interest rates, among other variables from silver to crude oil. Such derivatives, called âHedgeletsâ, are coming to Britain in mid-2006, HedgeStreet says. Suppose, for example, you are worried that interest rates on your variable-rate mortgage are about to climb sharply. You could buy Hedgelets that each pay $10 should rates rise above a given level over the coming months, but that pay nothing if rates do not rise. The initial cost of the contract, perhaps $5, depends on puntersâ forecasts of the future path of mortgage rates. If your worries about higher rates prove correct, you double your money, which you would then use to help cover a mortgage payment. If interest rates go down, you lose your initial stake, but you can console yourself that rates are not as high as you had feared. HedgeStreet offers Hedgelets on many things besides mortgage rates. For protection against rising petrol prices, it offered (at the time of writing) to pay out $10 if a gallon of petrol rose above $2.01 (petrol was $2.00 at the time, while the Hedgelet cost $7). There is also a Hedgelet that, for example, allows Americans planning a holiday in the euro zone to protect against a falling dollar. Derivatives based on house prices, while new in America, have been around for longer in Britain, where house prices have trebled in the past decade. IG Index, a spread-betting firm, has allowed people to profit from predicting movements in the house-price indices for eight cities compiled by Halifax, a mortgage bank. Housing markets seem an especially promising area for Hedgelets, because for every person worried about house prices falling, others are anxious about rising prices and the difficulties of saving for a down-payment. Although their progress depends upon evolving financial regulations, firms such as HedgeStreet can help bring both sides together. Such hedging could be the start of a flowering of new kinds of insurance for many types of risk. One day you might be able to buy insurance against the risk of career failure, by entering into a contract in which you give up a slice of your income should you become, say, a famous actress, but in which you receive support should you never make it big. Or you might buy a derivative that enables you to participate cheaply in the economic growth of developing countries such as China and India. For now, though, keep in mind the difference between reducing the risks you already face and speculating for profit. If you think you have discovered a hidden talent for predicting San Diego house prices or the movements of the Swiss franc, gambling on such variables is the surest way for most people to lose sleep. John Smutniak is a former economics correspondent for The Economist.