patrick.net

astrid,

It wasn't Wall Street types that "commoditized" housing. Developers did. Along with their willing accomplice (the specuvestor, flipper and condo flipper). In many, many instances there was not the least intent to grow old in, live, occupy or even SEE the freaking condo! In some cases they were sold multiple times before they were "placed" with an end user. Robert Shiller just legitimizes the process. Provides guidelines and ground rules along with liquidity and transparency! In no time at all you will be telling me "Yeah, DinOR you're reading the housing futures (you're just reading them all wrong!) This (along with the Zillow's) will weaken the "death grip" MLS monopoly.

astrid,

All the housing futures and options markets mean is that there are participants who wish to hedge or speculate.

This market may not even work. Most of these kinds of markets fail because of lack of liquidity. SFRs have 0 open interest at this moment. Not exactly a fanfare rollout.

Assuming the market works, it's just a vehicle where differing interests can exchange risk for return. If I'm a builder, I may be ok giving up some of my potential return from building a new housing development in order to reduce my risk; like buying insurance against a market slowdown. If I'm a speculator on the other side of that deal, I'm willing to take on additional risk (that the market won't slow) in order to win greater returns.

Lots of non-commodities trade as futures and options. Every single listed stock future and option is non-commodity (each company is unique, and has its own idiosyncratic set of determinant technicals, in addition to the industry and market).

The direct qutoes for the CME housing index futures are here.

They appear to be more up to date than the futuresource link Peter P put in the OP. Note that the options are ONLY PIT TRADED. Since they're not on Globex, we can't get quotes yet.

DinOR, what you say we head back to Chitown and get some yellow & red jackets, head down to the floor, and work some SFR options?

And we have 1 open interest on 2/07 SFR contracts, lol.

FEB07 ---- ---- ---- ---- ---- UNCH 224.80 1 1

A few people (a very few) are buying the composite index though:

AUG06 ---- ---- 228.00A 228.00A ---- -300 231.00 1 1
NOV06 233.00 233.00 229.00 229.00 ---- -860 2 237.60 1 1
FEB07 231.00 231.00 231.00 231.00 ---- -400 1 235.00 2 2
MAY07 232.20 232.20 231.80A 231.80A ---- -440 1 236.20 2 2
TOTAL EST. VOL VOL OPEN INT.
TOTAL 6 6

Randy and DinOR,

Thanks for your explanations. So the CME futures is not really a contract options market but a derivative market based on the performance of a RE index.

This actually sounds pretty sweet for specuvestors. Now they can speculate on RE with much lower transaction fees and they don't even have to pretend they know anything about houses.

Astrid,

Very very very few investors on the various exchanges in Chicago and New York ever take delivery of their contracts. In fact, if you actually try to take delivery of a barrel of crude, for example, you'll find that there are huge disincentives set up to prevent your doing so frivolously. Things like stipulations about exactly where, when and in what form you have to take said delivery, and usually additional fees.

These are financial instruments used to structure the transactions whereby suppliers and buyers exchange commodity goods. If I buy oil from you, I buy it from you, not from the CME; but I use the CME to hedge that purchase.

astrid,

What I love about just having a futures market is that it puts an end to a lot of the BS. With futures trending down in your area of interest it's going to be a lot tougher sale for a realtor b/c these numbers will be available to the public. On the other hand if futures are trending higher a seller may be able to command something of a premium! I hope their implementation will speed up the crash, then as we begin to recover in earnest we will do so with some semblance of guidance. Ahem, we should be celebrating here people!

Randy H,

Never worked the pit although I often thought I would have liked to give it a shot! I just wish I could have been there to see the "southside rumble" w/the Sox/Cubs inter-league play! I wouldn't be too concerned about not being able to get live quotes just yet. Believe me when you open an account your trader will be IM'ing you every half an hour! If you don't have IM he will be calling you on every tick. It'll be more labor intensive at first but what are you gonna do?

Lill,
To me, the biggest help that this forum has been is being able to convince myself that moving out could potentially be a good thing. I say this because the mantra back home is still " go west young man!" and often times, never come back because at the time that I left, things wern't that great there. Now that things have in some ways reversed, I feel a little better about this possibility. Still- I ask myself:" Is that the right choice? If I wait, will things get better?"It haunts me every day.
Beforehand, I figured that moving out would be admitting defeat and I'd be viewing myself as a failure. But on the other hand, living in a high-paced, expensive, challenging area like this has made me appreciate some of the simple pleasures that I always took for granted back home that are more difficult to come by here. Living here has also put me on a professional level that I might not have gained if I had never left. So wherever I move to, I will have world class experience.
In the meantime, I watch the parade of fools drive by all the open houses every weekend, listen to the frantic homeowners and how they will pay for their mortgages, and watch an entire city turn itself upside down over what all of here view as childish and stupid. It really irks me that people- smart people- can be so amazingly dumb, and that is what really gets under my skin.

DinOR, your anti-Amerikan rhetoric isn't welcome here comrade, perhaps you'd be more happy back in Russia. Enjoy your Gulag holmes. ;)

And we have 1 open interest on 2/07 SFR contracts, lol.

There is no activity. :(

TY Beanies on eBay have more transactions.

My simplified understanding of the Options and futures market are that they are zero sum legalized gambling. For every winner there is a loser.

A more accurate view is that it is a zero-sum game with three players: the buyer, the seller, and the middleman. Your broker makes money regardless.

To the buyer and the seller, the game is negative sum.

But.. has anyone else had the thought that in reality, perhaps blogs, newspapers, web sites, cocktail chatter, and so forth all about RE is really all that healthy?

I agree, I feel that the problem is too much information, and too much bad information, ie, proganda. The guberment says one thing, "inflation is low, the economy is robust", but your everyday experiences say another, no one is getting raises and haven't for a while, healthcare is out of control. Personally I am doing fine, can't buy a house but couldn't 15 years ago either, no down payment and no "alternative" mortgages. So who cares? I think the real issue to me is the lies being put forth and the data hiding. This site tends to reaffrim a lot of my thoughts. RE is crashing, personally I believe 2-3 quarter 07 is going to be a blood bath. That while the BA might have a few nice folks, the majority are money grubbing morons who's only concern is the next purchase and how much their house is worth. Good luck with that one fools. The housing run up is the greatest transfer of wealth I have ever seen, google? Yet another transfer, google isn't making great money, the only ones making great money are the insiders and the investment bank. Go to work at Google and I bet you would find, free lunches and dinners designed to keep you there 12hrs a day, sub par wages, and a bunch of pompous backstabbing morons trying to use your back as a ladder. Sorry folks there is no "google effect" you have just watched too much TV and expect that your life will be similiar to the show you watched last night. It won't be.

is proganda a word?
-proganda
+propaganda

It wasn’t Wall Street types that “commoditized” housing. Developers did. Along with their willing accomplice (the specuvestor, flipper and condo flipper). In many, many instances there was not the least intent to grow old in, live, occupy or even SEE the freaking condo! In some cases they were sold multiple times before they were “placed” with an end user. Robert Shiller just legitimizes the process. Provides guidelines and ground rules along with liquidity and transparency!

It's probably a good idea to re-emphasize for everyone else out there (who may not be Peter P/Randy H/DinOR/astrid finance rugus) that Robert Shiller (of Irrational Exuberance fame --a stalwart RE bubble bear) is the one primarily responsible for creating CME futures (note the contract name: "Housing S&P/Case-Shiller-"). He did so mainly with the admirable goal of building a more transparent pricing mechanism into the RE market and to provide an efficient hedging strategy that even regular slobs --like us-- could participate in.

I'm certainly not one to applaud measures to introduce MORE market volatility/uncertainty into housing market, and I don't think that's the intent here. DinOR, Randy, Peter P --is my "dumb guy" analysis way off base here?

HARM,

I'm pretty much the definition of a "dumb" layman. My understanding of derivatives pretty much starts and ends with rate of acceleration in HS physics.

Having said that, I think it is helpful to have a working understanding of this market. But it'll be interesting to see how the market develops. Theoretically, all the specuvestors should enter this market in lieu of the actual real estate market, since the transaction costs are much lower.

@WW2,

Fyi: this is Peter P's thread, not mine. My store of knowledge and experience in futures, options and derivatives could fit --comfortably-- inside a thimble, while Peter P is a NASD-licensed CBA (Certified Bubble Analyst).

To try to answer your questions...

But.. has anyone else had the thought that in reality, perhaps blogs, newspapers, web sites, cocktail chatter, and so forth all about RE is really all that healthy?

If the RE bubble consumes every waking minute your life, then no, it's not healthy. If you use this or other blogs as a way to cut through the Fog of Realtwhore/MSM propaganda --as Surfer-X suggests-- then I think it's very healthy. Personally, I'm long past the point where I come here for "new" information. I mainly use this site now more for entertainment value, moral support ("my name is 'HARM', and I'm a Jealous Bitter Renter") and as a creative way to kill time during the day when i'd rather not be working :-) . I generally "unplug" on weekends, holidays & most evenings.

Would people be better off simply to go with their gut feeling, use obvious financial data to determine their purchases if the opportunity arises? Do you feel better or worse about RE being immersed in data concerning it?

Think about this for a moment --would you have been "better off" buying into the teeth of monster asset/credit bubble the very moment it was ready to collapse? Is this the path to riches? I agree that sifting through all the data and conflicting opinions out there can be difficult and often confusing, but stick to a few core principles (the long-term "value" of RE or any commodity is determined by it's fundamental market supports --namely non-speculative supply & demand) and you'll make better decisions.

They can be used to hedge risk, but so can Vegas

How can one hedge with vegas? For example, if I'm an airline buying jet fuel for the next 6 months of operations, how would I use Vegas to hedge future fuel price volatility?

Saying most futures market activity is resultant from speculation is not accurate. It is true in some futures markets, not in others. Remember that there are enormous hedge funds out there using derivatives to do their thing. And, that thing is not speculation, by definition.

By the way, you guys do realize that INSURANCE is a form of an option, right? In fact, a 30 year fixed home mortgage is debt with 2 built in options.

If derivatives are legalized gambling then so is insurance. Why do you think some company is willing to take nominal amounts of cash from you with the promise of paying you back huge amounts of cash if your home burns down? Seriously, think about why they'd do that--why they are even in business--and you've figured out a huge portion of why options work.

Peter P is a NASD-licensed

Disclaimer: I am not licensed.

HARM,
I think I too use this forum much in the same manner as yourself, which is basically to unwind from time to time. I don't use computers at all on weekends or trips( except as of now since I'm redoing my site). It has also helped talking with my wife about it, who finds RE even more asanine than I do and isn't at all interested in spending our every penny on something we have no business "buying". Lastly, I secretly harbor the need to see this thing come crashing down. I've heard from so many people how great RE has been for them, and how the risks they took were worth it. When it does come unwound, seeing the reaction and sharing it with people who've been "doing battle" for a few years will be rewarding in a sinister kind of way.

Theoretically, all the specuvestors should enter this market in lieu of the actual real estate market, since the transaction costs are much lower.

astrid,

This is an interesting take on the Shiller funds. It would be nice to think they could provide a "shunt" for specuvestor dollars --taking the specuvestor/flipper locusts away from inciting bidding wars in people's neighborhoods-- but I doubt this will happen for several reasons:

1. $500K/250K capital gains exemptions (& 1031 exchange) can only be claimed for trading in REAL housing.
2. GSEs & REIT-issued MBS/CMO money cannot be funneled into trading Shiller futures.
3. Fed's 1% ("free") money for banks to lend could not have been easily funneled into trading Shiller futures.
4. FCBs from our primary trading partners (China, Japan, Kprea, etc.) with massive amounts of extra dollars to "park" somewhere are not likely to plow it into futures en masse the way they have MBSs/CMOs.

Peter P,

(*Ahem*) I'm still waiting for you to post my graphic for the "Orb of Influence" thread. :roll:

WWII,

What risks? All I hear is that RE is a win-win deal and that it never goes down, so everybody has to be in NOW!

HARM,

I don't think the CG exemptions would apply for the true specuvestors (as distinguished from DinOR's 24 month young couple) and lending is unnecessary if you're not carrying the full value of the house. So I don't see why specuvestors cannot work this market.

Great points on taxes and lending practices though. For any home owner even dreaming of using this market, tax planning is essential. This is yet another area that works best inside 401K/IRAs.

HARM perhaps you should bribe Peter P with food. I here he will do all manner of things for Toro

shit, I have not had enough coffee

-here
+hear.

dammit

$9 toro is an awfully high bribe. Maybe HARM should bribe the administrator directly...I see an arbitrage opportunity.

astrid,

One of the great things about what's taking place here today as the HF are ramping up, is that up until Monday ONLY BULLISH people "dabbled" in RE! There were only bulls! No bears need apply. We've just shattered all of that and it truly is a brave new day. We now have two sides to the RE market! Had these investment vehicles been in place in 1997 we would not have sustained near the damage we are likely to see in 2006 to 2008. Lenders will be able to load up and this might prove to be Fannie and Freddie's salvation. If they are not taking bearish positions, they should be.

I find the problem with all the esoteric products is that only a few people in the world have the time or patience to truly understand them.

Esoteric? Are you talking about futures or astrology?

It doesnt’ really matter what the bet is because all you are interested in is volitilty. So bet on the CBOT or bet on Black it’s pretty much the same.

First, I asked how one could use Vegas odds-machines to HEDGE, not SPECULATE. I'll answer, one cannot. It is not possible to offset volatility with a random distribution.

Secondly, Vegas house-odds driven games actually have no volatility. The minimum odds are known, set by the gaming commission, and actually predeterminantly programmed into the various machines. Card games are similarly known distributions. Only Poker offers some form of true volatility.

Thirdly, Health insurance is absolutely an option, from both sides. I have the option to buy it or not, the company has the option to sell it or not. If we agree on the contract, a timed instrument, then I receive diminishing value from the contract as time expires. Because I cannot assign it does not make it not an option. There are other non-assignable options. In fact, many OTC options are non-assignable.

Insurance uses statistics to figure out their products, pricing, etc. And this is different from an options market how? Only in the fact it is regulated differently is there a mathematical difference to the theoretical proposition.

If you figure in OTC, there are many more than 1% deliveries. Also, if you're going to define "delivery" like you are implying, then you would need to include all "purpose of transaction" contracts, which drives delivery up to ... well ... 100% (for commodity backed derivatives).

Someone, somewhere actually has the commodity asset. And they won't just sit on their pork bellies, wheat, or oil. It will go to a buyer. The reason the producer uses the Futures and Options markets is to ease cash flow vs. debt burdens. Financial engineering. If I sell wheat, I may be better off selling today at known price X on the futures market than sell for the exact same amount tomorrow, but have to borrow in the interim to fund operations. That's a use that involves no volatility driver.

I just thought of something. If you add in currency futures, which is by far the largest and most liquid futures market, then you have a huge amount of hedging activity. Just about every multinational company is hedging millions daily to eliminate foreign currency exposure. Speculators sit around the edges trying to sop up the volatility as profits. (And hedge funds sit around the edges of them sopping up their losses).

By the way, a Roulette bet on Black or Red is a binomial distribution. There's very little statistics to that; it's all mathematical probabilities.

Randy H,

Thanks. I thought I got on the "party poker" blog for a minute there. Anyway, I can readily visualize insurers and auditors not only advocating but insisting that the firms they do business with in the future having a "managed futures account" or at the least an investment relationship at CME/HF in line with their level of exposure.

Oh, I see here that you have $600 mil. in "sub-prime" exposure in the Las Vegas market. You know Mr. Lender, folks in your peer group usually have at least ____ % of their loans of this type hedged through the CME and I was noticing you're not siphoning off any of profits toward hedging this position. Do you know something the rest of us don't? You know Mr. Lender if we are to continue to rate your debt paper at AAA you might want to consider..........

Regarding the impending real estate crash: Like they say, you've got to break a few eggs to make an omelet.

Please hurry, I'm gettin' hungry!

Michael Holliday,

Yeah, uh I waited for what felt like an ETERNITY to see the FED start raising rates and when they finally did come it was nickel dime a$$ sh*t. The HB on the other hand is gaining momentum by the day. I said it before but, 2003 was all about the housing BOOM (not the bubble). 2004 was, "well there might be a bubble". By mid-year 2005 most financial reporting acknowledged a bubble but couldn't seem to form a consensus as to wether it would be a hard landing, soft landing or if it would pop at all? When I look at just how much sentiment (and reality) have shifted I'm frankly astounded at how far we've come so fast!

To the buyer and the seller, the game is negative sum.

As a function of $, yes but not as a function of utility expectation.

That's exactly what Black-Scholes is about. In fact, all B-S proves is that risk decreases as time goes on, so options are more valuable the further away from their maturity they are. Then there are some fancy integrals resulting in probability distributions, and solved with differential equations. Something any engineering undergrad can do.

The option is valuable because it gives me some form of insurance against an unknown future. A long dated option, like 1 year from today, is much more valuable than one expiring tomorrow, all things being equal. Why? Because I have 1 day's worth of risk versus a whole year's worth of risk.

Anyone who's taken stats will recognize the above paragraph implies a binomial decision tree problem. In fact, it is possible to solve options valuation with a binomial model yielding almost the same (and sometimes more accurate) value than B-S. It is computationally heavy, and requires people understand more to set up, so it's not as popular. I believe the FAS on stock options valuations for public corps allows either B-S or Binomial.

DinOR Says:

"When I look at just how much sentiment (and reality) have shifted I’m frankly astounded at how far we’ve come so fast!"

Yes! I'm just hoping one of my relatives here in Phoenix can sell the investment house before sh-t goes down hill...The amount of houses for sale is skyrocketing as we speak!

Housing will come down in the BA. People will be punished for their irrational exuberance. I grew up in San Jose, I'll be back when prices
slide...and they will. The Lord willing and the creek don't rise...

Michael Holliday,

I wish them the best but with the inventory exploding it's going to be difficult for sellers to distinguish themselves in an increasingly crowded market place. Only one way I know. Price. Price cures all. It's kind of funny, especially in the SW (and I consider SoCal part of the SW) where so many homes look identical and none of the buyers seemed to mind on the way up? They just wanted anything to get their foot in the door to "investment homes". Now they are finding out just how remarkably unremarkable they are.

New thread: The Google parody picture Peter P was afraid to show you!

First day of CME Housing Futures Trading: technical discussion on my blog.

Mr Vincent Says:
I wonder if we will be able to bet on the future prices of Chicken McNuggets before long?

Why…why…why?

exactly, the commodification of everything...

or is it the derivation of everything?

problems with a market-based approach to something? how do you solve it? you know the answer -- create another market!