Convinced it’s a Bubble? Have a Hedge.

If you have a big mortgage and not a lot of equity, you might be feeling a little squeamish about all this talk of soft markets. In The New Yorker, James Surowiecki describes some new ways you might be able to protect yourself.

There is one much feared cataclysm, though, against which everyone has so far been defenselessóa housing-price slump. Seemingly every magazine and newspaper in America has now prophesied the imminent bursting of the housing bubble. But even though many Americans have invested all, or almost all, their net worth in their homes, they’ve had no way of insuring themselves against that asset’s value taking a severe tumble.
That’s all changing. At a new online site called HedgeStreet, investors can bet on changes in home prices in certain cities. And later this month the Chicago Mercantile Exchange is going to start trading futures contracts pegged to housing-price indexes in ten major metropolitan areas. The Chicago plan, which is the brainchild of two economists, Karl Case, of Wellesley, and Robert Shiller, of Yale, is straightforward: if you just spent, say, $1.5 million on a two-bedroom apartment in Manhattan, and you want to hedge against the risk that it might be worth $1.2 million three years from now, you can sell contracts that will reap you a profit if local prices fall, allowing you to lock in the current value of your home. Alternatively, if you think the housing boom in Los Angeles still has a ways to runóor if you’re interested in buying a year from now but are afraid that you’ll be priced out of the marketóyou can place a bet that will pay off if prices keep going up.

You can watch the price of New York City property futures on HedgeStreet (with a twenty minute delay) here. Interesting stuff.
Surowiecki points out the drawback: are Americans really in a mood to dilute potential gains from real estate? It’s so ingrained in us that real estate is a good investment. I have a hunch it won’t take off. But for all those pessimists out there, here’s a chance to put your money where your mouth is.

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