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A New Way to Hedge Your Home's Paper Profit

Contributed by mm | December 12, 2004 7:09 AM PST

Do you benefit from hot real estate market in the last few years? If you suddenly realize your house has doubled your original purchase price, and start to worry that the house price cannot be sustained, you might think you are facing a dilemma: you need a place to live anyway, but you have to cash out to pocket the paper gains. There are two investment products for your recrue.

This New York Times story discussed two alternative investment tools.

The first comes from Macro Securities Research. The company will issue a number of products at Chicago Mercantile Exchange. For each city, you will find one product that correlates to the average price gains in a city, while another product will inversely correlates to the gain. That way, you can take advantage of the hot market without being a homeowner, or hedge your paper gains when you are one.

The second option is from HedgeStreet, which sells $10-a-pop wager that bets whether or not a housing index will be in a certain range in the next three months. Six cities are currently covered: New York, Miami, Chicago, Los Angeles, San Francisco and San Diego.

Before you jump in to buy either of these hedges, beware that there is a price for the hedging. For the first tool, you are paying the time value of money -- you probably need $100,000 investment to hedge your $200,000 equity, and your $100,000, if invested thru other channels, can earn you interest or dividend. For the second tool, you will lose the entire $10 if your bet is off, and you know you are betting against people who make a living on it.

For me, I don't think Seattle will be one of the cities any time soon, so I really don't have a choice.

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This Post Has Received 1 Comment. Share Your Opinions Too.


Dan Commented on December 13, 2004

These property hedging tools are interesting. However, after realizing a tri-fold increase in our southern Cal home I had to "lock in" the paper profit -- I sold the home and relocated to another state. And a cheaper cost of living to boot (www.aslowerpace.com).

Keep up the interesting posts! I try to hit your site every day.

.....Dan



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