How can I hedge my investment in a Miami condo?

Question

I bought a condo in Aventura, FL last July, and now I am worried about falling values. Are there any SPECIFIC investment methods to hedge my real estate. Please no general answers - I've already searched "hedge funds" and can't find anything specific. Thanks.

Answer 1

There is a futures product that was designed specifically for what you want to do -- Housing Futures traded at the Chicago Mercantile Exchange. They have a contract specifically for Miami, FL, which would probably be the best one for your situation. These futures contracts are based on the S&P/Case-Shiller Home Price Index.

Right now the index is 278.20 for August 2006 and is predicted to be 255.20 for May 2007. Each contract is $250 times the index, so a August 2006 contract is worth $69550 of house and May 2007 contract is worth $63750 of house. The market is already pricing in a 8% decline in housing prices from August until May 2007 because the index for May is lower than that for August.

There's nothing you can do about that 8% decline in price. But if you think that the decline will be more than 8%, then you would want to sell a May 2007 contract. You will make money if the actual index is lower than 255.20 in May. You will lose money if it is higher than 255.20 in May.

Presumably, the market value of your condo would track the changes in the Miami housing index. Granted, this is not an exact hedge, but specific to the Miami area real estate prices. The best hedge would be to sell your condo entirely, and I don't think you wanted that.

Futures are complicated investments, and housing futures are rather new. However, I think they can be understood if you do enough research and reading. I don't think it's above the person of average intelligence with enough effort.

Housing and mortgage stocks have been so beaten up lately that it's very risky to be going short on any of them right now.

Answer 2

No, a hedge fund is hedging their own investment.

I'm not that familiar with real estate, but I can give you a few ideas to investigate.

You're trying to find an investment vehicle that closely correlates to real estate, like REIT's. I'm not sure if you can trade options on these or not. If they appreciate evenly with real estate values, then the idea would be to sell them short, or alternatively, but a Put Option, if available.

You could probably sell short or buy puts on Fannie Mae and/or Freddie Mac. They own most of the mortgages in this country, and are going through an accounting scandal right now. Funny, nobody went to jail, but those cooked books may bring both companies to their knees later in the summer, and this may be a good short play anyway, regardless if real estate goes down. If real estate does go down, you get a double whammy (reward) on your Puts or short position. You could make more money on your hedge than you would on your real estate investment. Just try to close this position before they go bankrupt, or before the gov't bails them out.

Answer 3

This is not my area of speciality either, I suppose, though, that you need to ask yourself what happens if real estate continues to go down the crapper. What does that possibly do to, say, the interest rate? How can you make a hedge out of that....I think you see where I am going with this. Another thought would be to short or use derivaties to sell publicly-traded real estate development firms or companies that supply these firms with materials. Finally, take a look at this: http://bubblemeter.blogspot.com/2006/03/real-estate-future-contracts.html

Answer 4

I suggest you to apply for a loan and use your condo as collateral and use that money to invest in the REITs (Real Estate Investment Trust) in areas outside of the United States of America or outside of the Coasts (To hedge your invesment against hurricanes) or simply in Real Estate Markets with faster growth.

You will make returns much bigger than the cost of the interests you have to pay and you will pocket the rest.

After a while you will have more profits from your REITs than from your condo. (I don´t know if you live there or if you are renting the property)

If you need more detailed FREE information about hedge strategies for real estate investments drop me a line.

It's my job to protect my clients' real estate investments from real estate bubbles. (I am a Portfolio Manager)

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