How to Short the Residential Real Estate Market

Posted on July 7th, 2009 by admin in How to Invest

If you own a stock, you can buy “insurance” against a price drop by buying puts, or buying anti-correlated stocks. These diversification moves are easy for the massively liquid stock market. But suppose you are concerned about the value of your house dropping substantially. Just about everyone who cares about this has no direct means to hedge the possibility. Until now. Prof. Robert Shiller (yes, THAT Shiller, who famously called the top of the Tech and Housing bubbles) rides to the rescue with a really clever way to short the residential real esate market.

On 30 June 2009 NYSE Euronext (NYX) announced that its wholly-owned subsidiary, NYSE Arca, began trading MacroShares Major Metro Housing Down Trust (Ticker Symbol “DMM”) and MacroShares Major Metro Housing Up Trust (Ticker Symbol “UMM”), both exchange traded products. These new securities are sponsored by MacroMarkets LLC, which was co-founded by Prof. Shiller.

The MacroShares Metro Housing products are based on the S&P/Case-Shiller Composite-10 Home Price Index, an established indicator of U.S. home prices in the 10 largest cities.  MacroMarkets states that MacroShares Major Metro Housing trusts provide investors with access to the housing asset class, allowing for leveraged investment in either the upward or downward movement of home prices with no issuer or counterparty credit risk.

As described by MacroMarkets, UMM and DMM are paired trusts that work as follows. When UMM are created, an equal number of DMM are also created. UMM funds are invested in the “Major Metro Housing Up Trust.” DMM investor funds are invested in a separate “Major Metro Housing Down Trust”. These trusts enter into a settlement contract: a binding agreement to pledge assets to one another over time, according to a predetermined formula that is driven by changes in the Reference Index. The trusts feature a 3x leverage factor, such that the underlying value of each is intended to track three times the cumulative percentage change, upward or downward, in U.S. single family home prices, as measured by the S&P/Case-Shiller Composite-10 Home Price Index.

UMM and DMM track three times the percentage change of single-family homes, as measured by the Case-Shiller Composite Home Price Index. Essentially, this is a way to Short or Buy the value of residential real estate with one transaction. If you are bullish on housing, buy UMM. If you are bearish on housing, or want to hedge the value of your own home, buy DMM. Details are given in the fund’s detailed prospectus.

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