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The Nation's Housing

How to Hedge The Value Of Your Home

By Kenneth R. Harney
Saturday, December 18, 2004; Page F01

Could you lock in your home's current value and be protected against future real estate market declines? Could you, in the lingo of the financial markets, hedge your home-equity holdings?

Such questions are highly relevant for those who wonder how long the housing-appreciation boom can last. How long can the average American house gain more than 1 percent a month in value, as it did in the past 12 months, or gain close to 50 percent in value over five years?

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A possible answer was proposed in a late November filing with the Securities and Exchange Commission. A company called Macro Securities Research LLC expects to begin offering a new financial instrument in the coming months that will permit anyone to hedge their bets on housing-price changes in real estate markets across the country.

Though the underlying structure of the securities is complex, the bottom line for homeowners is this: If you are worried that your equity might decline, you will be able to go to your stockbroker and buy a hedge security that protects you from loss.

If you think it's likely that housing prices will fall in your area over a period of time, you could buy what the SEC filing describes as a "Down-Macro" that insulates you against equity loss. Think of it as similar to taking what's known as a short position on a stock. You are betting that an asset, in this case your house, will sell for less at some time in the future.

If the system outlined by Macro to the SEC works as planned, your short, or down, position will be matched with an investor, probably a big institution such as an insurance company or pension fund, that buys a "long" or "Up-Macro" position for its own portfolio-hedging reasons.

The ambitious Macro concept for a new market of housing price-indexed financial instruments might not be credible without its developers' sterling credentials. Two of the co-founders, Robert J. Shiller and Allan N. Weiss, helped pioneer the system of local housing price indexes used by the federal government, investors Fannie Mae and Freddie Mac, and many large mortgage and housing firms to gauge property value changes in hundreds of localities. Their firm, Case Shiller Weiss Inc. of Cambridge, Mass., also created the CASA automated property valuation system that many lenders and banks use to estimate home real estate values online, at far less expense than conventional appraisals.

Shiller, an economist at Yale University, is well known for another reason. He wrote the book "Irrational Exuberance," which warned about the speculative bubble in the stock market preceding the market bust of 2001-02.

Macro's chief operating officer and co-founder, Sam . Masucci, is a Wall Street hedge fund and mortgage securities veteran who helped develop the "shared appreciation" home mortgage in Britain.

In an interview, Masucci said the creation of housing-price-indexed securities, not only Macros but futures contract trading programs, should spark a wave of innovative, housing-related financial products for consumers and investors. Among those being planned are home-equity insurance policies and a new breed of mortgages that carry discounted interest rates because the lender's risk of loss on the property is hedged in the futures market.

The Chicago Mercantile Exchange confirmed this month that it is working with Macro Securities to develop housing-price-indexed futures trading programs for institutional and individual investors. The Macro securities now in registration with the SEC are expected to trade on the American Stock Exchange.

Equity protection is not a new idea. Capital-market experts for years have worked on ways to tap into the nation's largest, relatively illiquid asset -- Americans' estimated $22 trillion in home real estate holdings. But the development of accurate, widely accepted housing price indexes covering hundreds of markets, down to the Zip code level, has opened the door.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.


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