The Housing Market
In today's Lowell Sun, it talked about a report from Mass Assoiation of Realtors, stating that home sales in the Massachusetts have reached a 10-year low, and have fallen 21% in the period from Jan 2005 to Jan 2006. It takes no rocket scientists to figure out that the housing market is slowing down. For a bear like me, this is another reason to support my belief that a market correction is waiting to happen.
Ever since the burst of the tech bubble, the housing market has been fueling our economy. Just look at the performance of the Vanguard REITs Index Fund, the price has risen almost 100% in the last 5 years. A few years back, it was not uncommon to see a 30-40% annual return in these products.
Well... we have traded one bubble to another one. According to an article by the Economists, Goldman Sachs estimated that the total housing-equity withdrawal was at 7.4% of personal disposbale income in 2004. Yes, it means that people are spending money off from the house. As long as the housing market keeps growing, refinancing will continue to help people find new money, and hence new creative ways to spend the money to support the economy.
What happens if a major correction happens in the housing market? In the article by the Economists, it shows how even a soft landing in the housing market in Netherlands has caused a recession in 2003. Similar phenomenon happened in Britain and Australia. And of course, the Japanese market has suffered a 14-year decline in both the housing market and the economy as a whole.
Is America next?
Well, how can hedge against a housing market crash? Doing a little search today, I come across a product by Hedgestreet. Instead of traditional option trading, it offers something called a Hedgelet, where the owner receive $10 if the index is above the strike price at expiration, and $0 if the index is below the strike price at expiration. The good news is, one can buy these Hedgelets for 6 housing markets: Chicago, LA, Miami, NYC, San Diego, and San Francisco. There are also hedgelet for Crude Oil, Gasoline, Natural Gas, and even currency exchange such as EUR/USD. There are also more gambling feel hedgelet on CPI, mortage rates. They also offer future hedgelets, where the outcome is not binary.
Ever since the burst of the tech bubble, the housing market has been fueling our economy. Just look at the performance of the Vanguard REITs Index Fund, the price has risen almost 100% in the last 5 years. A few years back, it was not uncommon to see a 30-40% annual return in these products.
Well... we have traded one bubble to another one. According to an article by the Economists, Goldman Sachs estimated that the total housing-equity withdrawal was at 7.4% of personal disposbale income in 2004. Yes, it means that people are spending money off from the house. As long as the housing market keeps growing, refinancing will continue to help people find new money, and hence new creative ways to spend the money to support the economy.
What happens if a major correction happens in the housing market? In the article by the Economists, it shows how even a soft landing in the housing market in Netherlands has caused a recession in 2003. Similar phenomenon happened in Britain and Australia. And of course, the Japanese market has suffered a 14-year decline in both the housing market and the economy as a whole.
Is America next?
Well, how can hedge against a housing market crash? Doing a little search today, I come across a product by Hedgestreet. Instead of traditional option trading, it offers something called a Hedgelet, where the owner receive $10 if the index is above the strike price at expiration, and $0 if the index is below the strike price at expiration. The good news is, one can buy these Hedgelets for 6 housing markets: Chicago, LA, Miami, NYC, San Diego, and San Francisco. There are also hedgelet for Crude Oil, Gasoline, Natural Gas, and even currency exchange such as EUR/USD. There are also more gambling feel hedgelet on CPI, mortage rates. They also offer future hedgelets, where the outcome is not binary.
by Raymond Yim at 10:49 PM
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