A Security For Calculated Risk to Buy

In a series of posts CR of Calculated Risk, who posts here most Mondays, argued rather conviningly that there is a housing bubble (e.g., here, here, and here). Soon, he’ll have a chance to bet invest accordingly (WSJ-subscription):

Robert Shiller knows bubbles, and he might have just the solution.

The Yale University finance professor – and author of “Irrational Exuberance,” a book that deftly called the dot-com bubble – is a lead figure at Macro Securities Research. The New York research group has developed financial instruments – called “MACROs” – that will be tied to a housing index that tracks property values in certain cities. By purchasing Up MACROs or Down MACROs, investors would be able to place bets on whether a property market is going to keep rising, or whether it’s going to fizzle.

In effect, speculators could play the bubble: They could short the City of Angels and go long on the Big Apple, or vice versa. Homeowners in bubbly markets could hedge against a pop. They could stand to gain if the value of their homes go down. If property values keep rising, of course, the homeowners lose on their MACRO investments — but at least their homes would be worth more.

These days Mr. Shiller is convinced the U.S. housing market is rife with bubble-like behavior. Home-buyer psychology today “fits in with the model of a bubble,” he says. “It’s a wishful-thinking atmosphere that develops the idea that everything is going to be all right, and there’s the sense that you have to get in at any cost because prices are going to keep going up.”

Robert Hartwig, chief economist at the Insurance Information Institute, says the MACRO securities may be the best — and only — way homeowners can protect the value of their homes. Speculators, including hedge funds, could help add liquidity to the market, he says.

MACRO Securities has filed plans for the new securities with the Securities and Exchange Commission. The company intends to roll out its MACRO securities later this year and, in its filing with the SEC, said it hopes to list the securities on the American Stock Exchange. It also has a deal to develop housing-price-indexed futures with the Chicago Mercantile Exchange.

I’ll have to ponder whether the emergence of a financial instrument that allows investors to short residential home values will hasten the bursting, or perhaps listing, of the bubble.


UPDATE: Mark Kleiman reports on some shorting of his own:

Assuming that the deal doesn’t come unstuck between now and the June 15 closing date, I’ve just sold my house. My current place is pleasant to live in and very convenient to my job (about a 12-minute commute, with no freeway driving), and I’m not planning to change jobs or marital status.

I’m selling for purely speculative reasons; I’m going short the Los Angeles housing market. That is, I’m planning to rent, and perhaps to buy back in when housing prices bear a more reasonable relationship to incomes.