Predicting home prices

About Altos Research Corp.

Altos Research is the premier source for real-time real estate research. Our real estate data and local real estate reports are used by financial firms, investors, and thousands of real estate professionals around the country.

This blog is primarily authored by Mike Simonsen, co-founder and CEO of Altos Research. Other ways to be in touch:

Live Chat

Monday, May 29. 2006

I love the concept of the predictive power of futures markets

- a market where people get together to buy and sell securities based on an underlying commodity, or product. There are two types of players in these markets, the Hedgers and the Speculators. Despite the bad rap that Speculators often get, both are legitimate, even necessary components of the market. The Hedgers have an underlying business and use futures to eliminate the risks of outside factors (like interest rates, or foreign exchange rates, or jet fuel costs) on that business. The Speculators make their business to profit purely from the moves of the market itself. The Speculators provide liquidity for the Hedgers- there's always someone there to buy the risk I'm selling, at the right price.

It is this 'right price' that makes the predictive power of the market so compelling. You get enough people with enough detailed knowledge and vested interest and the market price quickly illustrates itself a model of efficiency. (I'm sure you've heard the predictive-accuracy stories about the Iowa markets for things like political races.)

For a long time I've thought a housing price futures market could be compelling. There's no real way to hedge you home asset value. No futures market predicting home prices moves. Well now there is...

Robert "Irrational Exuberance"
Shiller is the leading housing market bubble prognosticator. He's been on the bubble wagon for 3 or 4 years now. And he's started a company that has created the first housing price futures security. Tradeable on the Chicago Merc as of this week. In the grand scheme, this is a marvelous development. My problem with this particular market, however, is that it based on regional prices. And a regional perspective is nearly meaningless in real estate prices. Consider that the median price in Los Altos, CA, lost 25% between 2000 and 2001 when the last bubble burst. 2006 has finally moved prices back over their 2000 peak. But San Jose, median priced at half that of Los Altos, never even dipped in that period. For those of you from outside the Bay Area, Los Altos is less than 10 miles from San Jose. The CME housing market would have been an ineffective hedge for my Los Altos home.

So instead let's turn to something a bit more fun. Inkling is a new internet company that let's you set up futures markets on whatever you want. You trade for play money. In the spirit of going local, I set one up for San Jose. It's pretty simple, you buy up-market "stock" if you think prices will appreciate the remainder of the year. If you think the bubble is about to burst, buy the down-market "stock." (If it were real money, and you wanted to hedge a bubble burst, you'd do so because your down-market stock makes money that you lose on your home value.)

Once a week, I'll publish a blog entry on that highlights the measured price.

The market will function best if there's a lot of liquidity. We could theoretically set a market up for any town or even neighborhood. (We could have a Willow Glen price market. Or a South of Market market.) So go check it out. Could be fun.

Here's the Inkling blog.

Posted by Mike Simonsen in fun, methodology, Real Estate Prices, Silicon Valley real estate, Technology at 12:32 | Comments (0) | Trackbacks (0)

Trackbacks

Trackback specific URI for this entry

No Trackbacks

Comments

Display comments as (Linear | Threaded)

No comments

Add Comment

Name
Email
Homepage
In reply to
Comment	Enclosing asterisks marks text as bold (word), underscore are made via _word_. Standard emoticons like :-) and ;-) are converted to images. E-Mail addresses will not be displayed and will only be used for E-Mail notifications To prevent automated Bots from commentspamming, please enter the string you see in the image below in the appropriate input box. Your comment will only be submitted if the strings match. Please ensure that your browser supports and accepts cookies, or your comment cannot be verified correctly. Enter the string from the spam-prevention image above:
	Remember Information? Subscribe to this entry
Submitted comments will be subject to moderation before being displayed.