Could you lock in your current equity value and be protected against future real-estate market declines? Could you, in the lingo of the financial markets, hedge your home equity...
Could you lock in your current equity value and be protected against future real-estate market declines? Could you, in the lingo of the financial markets, hedge your home equity holdings?
Questions like these are highly relevant for large numbers of homeowners around the country who wonder: How long can the housing appreciation boom 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 the past five years?
A possible answer was filed late in November with the Securities and Exchange Commission. A company called MACRO Securities Research expects to begin offering an entirely new financial instrument in the coming months that will permit anybody from individual homeowners to giant institutional pension funds to hedge his bets on housing price changes in real-estate markets across the country.
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Though the underlying securities structure 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 the loss you fear.
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 taking what’s known as a “short” position on a stock. You are expecting or betting that an asset, in this case your house, will sell for less at some point in the future.
If the system outlined by MACRO in its S-1 filing at 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, were it not for its developers’ sterling credentials. Two of the co-founders, Robert Shiller and Allan Weiss, helped pioneer the system of local housing price indexes now 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 local areas. Their firm, Case Shiller Weiss, 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 lower expense than conventional appraisals.
Shiller, an economist at Yale University, is well-known for another reason. He wrote the best-selling 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, Samuel R. Masucci III, is a Wall Street hedge fund and mortgage securities veteran who helped develop the “shared-appreciation” home mortgage in the United Kingdom.
Masucci said the creation of housing price-indexed securities not only MACROs but futures contract trading programs should spawn a wave of innovative, housing-related financial products for consumers and investors. Among those already on the drawing boards are home-equity insurance policies offered by insurance underwriters to their homeowner customers, 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 early 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 have been working on ideas for years that would 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, even down to the ZIP code level, has opened the door.
Meanwhile, in Syracuse, N.Y., homeowners who live in the city and want to insure their equity against market reversals can do so already.
Home HeadQuarters Inc., a nonprofit group, insures between 50 percent and 150 percent of a home’s value against loss of up to $200,000, for a one-time premium of 1.5 percent of the home’s value. The program requires residency for a minimum three years, and is calibrated to an index measuring changes in median home sale values.
Kenneth R. Harney: KenHarney@earthlink.net.