The Housing Chronicles Blog: Hedging against the S&P/Case-Shiller Index

Monday, January 14, 2008

Hedging against the S&P/Case-Shiller Index

Buyers are skittish because they fear falling values, but if Dr. Robert Shiller had his way in a recent article in Big Builder magazine, builders would offer a type of insurance to protect against these fears to move inventory:

Builders buy these huge inventories of land, but they don't hedge them. Builders who have new homes could attach price warranties. Especially in this market, it seems warranties could be a huge marketing success. If they did that, they would want to hedge it. That's where we come in.

If you're giving someone a price guarantee, you're selling them an option. They're already for sale on the Chicago Mercantile Exchange. Somebody has to pay for the option. It has a cost.

I think [offering a warranty] might be a good marketing strategy. It only comes into play if the house loses beyond a certain amount [of value].

He says the same could be done for hedging land positions:

They have land. They could just take their own position in the future market and hedge it. They don't do that.

Interesting. A pipe dream or could this really work?

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