How do I hedge my real estate exposure?

Case Shiller indices trade on the CBOT... you can short 'em.

nyc10022, I think you are mistaken. The housing academic indexes don't have tradable securities.

It's possible, through CBOT but it's not something that you can call up your broker and do in 1 sec. flat. Also the volumes are very small, I'm not sure I could place a $100k bet.

Seriously, if you are convinced like me that prices will drop 40% but I own and am not willing to sell for personal reasons - it seems
almost impossible to hedge.

I actually didn't realize you guys were separate people when I posted. Anyway, there's no index to short for Case Shiller. Go to google finance and there's nothing that comes up when you type it into the box there to search for securities to trade.

hehe Google Finance.

These are futures contracts, no? So there's a significant declined already priced in.

Can someone clue me in to what "SRS" and "IYR" stand for?

"it seems
almost impossible to hedge."

It is because everyone (tech_guy, JuiceMan, not withstanding) knows the decline is in. You can't hedge after the fact.

well, just don't fall for that scam where you sign over the deed to the property and the new owner takes out a mortgage on it. Does that even work these days?

Anyway, there's no way to do this in the markets as suggested.

IYR is a security you can use, but it is for the whole U.S. market as is SRS (just different companies sponsor it). Anyway, the case shiller "index" isn't something that is tradable as 10022 said.

Is there no earthly way I can profit from knowing that my property will be down 40%?

Yeah really. The hedge is selling your apartment by pricing 25% off peak and getting it off your books by the end of Jan. However, at this point, measure the additional 15% (as a % of peak, not current) against a round trip of closing costs and moving costs. Shorting real indices or even futures contracts based on a broader area than Manhattan aint gonna do a thing for you.

Yeah you can sell it. As they say, the KISS method. Keep it simple. Your basis risk of hedging it is too high to be efficient.

PS: IYR is already trading at 2003 levels, but Manhattan coops are still around 2005 levels. Right there you have a mismatch that is huge.

Rhino is correct. Most people forget that the best hedge is a natural hedge. Not some security that is supposedly reverse correlated all the time. I do take issue with people throwing out investment advice on synthetic hedges like in the second post that are just unsustainable. jgr, my point of google finance is that it shows all securities, and this case shiller short isn't there.

My inlaws face the same issue...and guess what, the longer you wait the less of a decision you will have. Put in on the market tomorrow at 75-80% of peak and try to blow it the eff out now. Take the additional 20-30% of peak that you won't lose, and let it fund three years of free rent conceptually. Go with your gut, you have asked the right question. You know what to do.

Never the hell mind that stocks, even real estate stocks, will always be light years ahead of actual real estate values. Shit I am looking at this IYR chart and it looks like a long to me.

I'm not greedy. Happy with peak - 30%. This is what I'm thinking of doing - placing contingent offers on a bunch of places and bidding 50-60% below peak. Then placing my place on market for 70% of peak.

The problem you may run into is that Manhattan has a lot further to go and the other indices have fallen (you missed the trade in 2007). SRS just had a taxable event -- careful with those ETFs

You can trade futures on regional housing prices with CME Group. No this isn't something that the average investor can do but you are incorrect with this statement "Anyway, there's no way to do this in the markets as suggested."

Yeah, SRS is a weird beast. Obviously IYR is ahead of Manhattan market, but commercial RE in Manhattan is headed into a world of pain - is this really reflected in IYR?

You are going to have to rent in between. The good thing is you can without fear of missing anything for 2 or 3 years. You may sell your place for peak -30% but you will not get one accepted offer at peak -50% or -60%.... I mean think about what you are saying....if you could buy at 50% of peak what hope would you have of selling at 70% of peak.

So isn't this obvious - the index is behind in terms of where Manhattan will go, right?

IYR is a national index. WTF would you expect it to reflect Manhattan coops. You had a small hope of doing what you want by shorting a Manhattan commerical real estate REIT, but you probably already missed that trade too. Never mind, how do you even figure out how much $$$ to short? Forget that idea man. Sell your apartment. Period.

Look at SLG. Its up 200%.... You don't need this kind of shit in your life. You have the right hunch. You are late but not too late. Sell your apartment and find a nice rental for 2 years, if not 3 or 4.

I meant the CS index - the regional index is based on closed sales, no? Not that easy to move, btw. I'm continuously looking
for places to rent and there aren't any that won't require some adjustment of lifestyle (not so easy with 3 kids).

I think there's still money to be made shorting a Manhattan REIT. But which one?

The trouble with knowing that prices will fall (yes, I was a bear last year as well) is that if you have a whole household, it's not
so easy to up and move with all the constraints...

Leave shorting stock to the professionals. You are going to compound your problems. If you are in an apartment large enough for your whole family, maybe just stay there and forget about avoiding a loss. The loss is if you are forced to sell the bottom. Don't get into a nasty divorce in 2010-2011 is all I can tell you. Look at any of these stocks you are talking about and look at the up moves and then rethink the idea of shorting hundreds of thou to hedge your home. Its nuts and its late.

You should have shorted financials.... Probably a better hedge for Manhattan coops. That trade is not for the novice either.

Rhino: People who work in the financial industry are not allowed for compliance reasons to short financials (in general).
That is a hedge that we have always wanted to implement, but couldn't.

For all sorts of reasons, we have found it more pleasant not to rent. But faced with the prospect of declining equity, it
is definitely interesting to think about ways to hedge.

How is it that people can just give financial advice anomymously and without recourse? nyc10022 just thew out that someone in NYC should short a case schiller index that doesn't exist, and there's no accountability! no proof and no accountability.

It is a chat board, after all. Don't get so worked up.

IYR will be the UYG of 2009. REITS are always a year behind financials.

Rhino: why do you think IYR is a natural long?

The closest thing I know of would be the CME future on the New York Metro Case Shiller index (as per jgr above). But, as others have noted, this is likely to be a pretty imprecise hedge, since the index includes way more than just prime manhattan.

Why not sell your apartment and rent for a few years?

http://online.wsj.com/article/SB123050739970838189.html

Eunice, no one is giving financial advice. I think people are just very casually batting around ideas. It would be a grave mistake for anyone to confuse any discussion on an anonymous message board for financial advice.

IYR should be single digits summer2009. Chart

http://finance.yahoo.com/echarts?s=IYR#chart3:symbol=iyr;range=2y;compare=uyg;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

i hope for DOW 15000 in 2009, but Fear Dow5000.

We've given up on the rental idea because we haven't found anything equivalent to our place (yet) for the same amount
of money as carrying costs. With the household, it becomes very annoying (even when you hire packers and
unpackers) to move frequently. We need a rental in a building that is going to stay rental and is the same amount
of space.

I have been looking at IYR, and while it is not an exact proxy, I think that there is some room downwards and ditto
for Manhattan REITs. The question is, if Manhattan RE goes down 40% from today, what is the probability
that IYR would be up from where it is today and ditto Manhattan REITS?

Having said that, if someone fell in love with our place and paid, say, 10% off peak, I'd move tomorrow. The price that most buyers would bid for our place is 30% off peak. So, is it worth selling for 30% off peak to prevent HAVING (for the usual reasons - death, divorce, job loss) to sell for 50%+off peak?

What it's was at peak is irrelevant.

1) What will it sell for today (net)?
2) What are your best/mid/worst case estimates for what the price is going to end up at (net closing costs when re-buying)?
3) What your carry costs are in the meantime?
4) How much income can you generate from the gains you've made on your house.

Not easy to get precise answers on any of them. It sounds like you are looking for a free lunch. There is none.

1) Who knows?
2) Worst case estimate - circa 2003 prices
3) Carry costs - a little lower than rent
4) There won't be any gain, there will be a loss

more like 1990's levels you'll see in manhattan. nobody seems to understand financial term of "Depression", or as Paulson admits "once in a century" event...

1 BR=250K (doorman/elevator) 2BR=500K (doorman/elevator).
be patient.

The ides of march have yet to come.

Not sure I answered you correctly, jgr - swap (1) and (2)

counciler - then you would agree that shorting REITs (Manhattan-based or heavily tristate concentrated REITs) are a good hedge.
That way, I don't have to bother with moving my family out.

yes. i'm not going to use names of NYC REITS to short, but do your research. Alot of them could drop by 70% and some will go bankrupt over the next 12 months...I think you'll see a major bankruptcy of one of the big REITS before March...

Interesting comments by all.

I was not getting worked up at all... I just think if you were able to short a stock in size in order to protect what sounds like about $300-400k in equity, you'd do it professionally, is all. Also you'd be talking about shorting about a million bucks worth. I think you'd be very wise not to do it. If you bought around 2004 or earlier, the other question is why should you care per se. If you did, your monthlies are probably not bad. And yes, it is rare to find quality rentals. Conceivably there might be a luxury condo developer anxious to rent you an unsold apartment, and might consider paying your closing and moving costs. That is a consideration. IYR looks like a long to me because it has been in an uptrend since late November and hasn't made a lower low. It also just broke through its 50-day moving average, which is more than I can say for the S&P and many other major indices. I'd fear upside on newsflow of what the gov will do to prop real estate, whether it proves ultimately meaningful or not, imagine how you would feel losing $150k on your million buck short....while watching your coop comps get marked down day after day, through 2010.

PS> Even if you disagree, at least buy the SRS rather than short the IYR. Then the most you can lose is the share price...Decide your max pain, and you could put it all in SRS.

"Hedge" is a gambling term and a financial term as finance has it's roots in gambling. In gambling it means make not one bet but to bet on several possible outcomes in the same event. In finance it means to buy one asset and sell another with the same underlying risk. A gambler bets a little on a favorite, a little more on a long shot. A trader sells an out of the money call and buys some of the stock he/she may have to deliver. An individual holding property that represents the bulk of said person's net worth has no way to hedge. There might be some chance for diversification if you have significant non-real estate assets...

It's called cold hard cash. Luckily, still have a little of that filthy lucre lying around.
We've owned (not this particular property, but same market) since '00.
No-one likes to see their assets depreciate, if there's anything they can do about it.

I haven't gone through their books with a fine-tooth comb, but it seems like the
Vornados and SLGs of the world have a ways to go.

You can't hedge property because property is not exchangeable. IBM stock is exchangeable. A ticket at the dog track is exchangeable. Your property is not.

A hedge is not adding risk on top of risk. That's called "punting". Buy this, sell that, long this, short that. Punting is the name of that game.

i will place a bet that during the month of March, the new economic team will be back in congress declaring "we need another 700B or the U.S. will have a Depression".

Any takers on this?

FEAR FEAR FEAR...ohh the tactics used to persuade the peasants. Where is the 700B? hmmmm....

MacroShares, which has long and short ETFs for oil and other commodities, is supposed to launch an ETF based on the Case-Shiller indexes. They will be double-long and double-short. The "up" bet will have the symbol UMM and the "down" bet is DMM. They were supposed to launch in Nov but pulled it since the capital markets are pretty choppy.

Too bad they didn't launch it 2 yrs ago when you REALLY could have some money shorting Miami, Las Vegas, etc.

I agree with whoever said that shorting a NYC commercial property REIT is more of a punt than a hedge. Further, don't forget that 30% of peak off of 80% of peak is almost 40% from here. And getting 90% of peak at this point is a wet dream... If you bought in 2000, why care, because your monthlies are probably low. If you want to trade, trade. Be sure to know, however, that its far from a hedge. Before I'd go shorting SLG, I'd want to understand why its up 200% since late Nov. Was it deemed potentially bankrupt in Nov? Also remember stuff near or around bankruptcy trades like an option, not a stock.

If this is a Depression, how much S&P are you short? If this is a Depression and you are so sure, then you are wasting your time talking about Manhattan real estate and you should short the S&P down to 500.

Rhino, there is no hedge for real estate. You can only diversify your portfolio to minimize the impact of real estate on your overall net worth. If you overall net worth is 99.99% real estate, there is no way you can hedge and there is no way you can diversity. Why not post this topic? How much money did people make selling real estate over the past 7-8 years. I bet it was a lot.

Short S&P since '06

Long T-bonds

Gotta love it, check into Streeteasy this morning. Rufus is back saying poor people suck, nyc10022 isn't yet posting some news although he did some fly by advice here that remains unsubstantiated. Shorting Case Shiller, not possible as suggested in the second post to this discussion and also challenged by several above, but never let facts get in the way of a good story.

Nearly as I can see not really viable.

Besides the fact that the CBOT New York futures are for the New York metropolitan area and do not include Manhattan condo/coops, the futures that do trade already trade at a big discount to current so-called spot - as do virtually all of the other metropolitan area futures contracts. All you can do is bet that the actual will be even lower than the actual implied decline priced into the futures contract. (Only logical that the contracts would be trading at big discounts. Who would want to be long such contracts unless they were priced at a big discount.)

Well, of course they do... folks know the numbers are going down.

Why would you expect to benefit from a hedge at pre-crash prices when the crash is in?

"Gotta love it, check into Streeteasy this morning. Rufus is back saying poor people suck, nyc10022 isn't yet posting some news although he did some fly by advice here that remains unsubstantiated. Shorting Case Shiller, not possible as suggested in the second post to this discussion and also challenged by several above, but never let facts get in the way of a good story."

Wainley, do you have ANYTHING to add here?

(besides being wrong, that is?)

I think, he thinks, that while a 20% crash is in, a 40-50% crash is coming. Its not a terrible idea on the face of it. It's like selling stocks right after Lehman went tits up. You were able to save yourself another 25% of pain to the low. Reality is there is no free lunch. He needs to move in order to do this. And if by some miracle the correction stops at -30%, then it was a lot of trouble for very little. The other part of this equation is, that we have not touched on, is that at a 2000 cost basis, his equivalent rental might cost him much more than his current monthly payment, eating into his savings.... Yet that would be mitigated by putting the sales proceeds in a safe investment like t-bills...oh wait, those have no yield!

What happened here on suggestions? nyc1022 you had a thought about hedging with Case Shiller but that doesn't exist and it didn't seem like anyone else had a solution? Can you be more specific or let us know if you might have been wrong about it so I don't keep looking! thanks

"All you can do is bet that the actual will be even lower than the actual implied decline priced into the futures contract"

Hmmm...maybe that's why its called a futures contract? Thanks for the "lesson"

Not sure why you wouldn't short GS- it is THE proxy for Wall Street, no matter what their int'l exposure and it will pull MS along with both a ride up and move down. Since BAC and JPM are quite well diversified, your hedge should be an implicit bet on the worsening prospects for the city as a whole, and since Wall Street and capital markets activity, equity markets direction (heavy GS focus) will drive bonuses, and employment, and thus residential RE, I would think that's a closer read than shorting IYR- which has a huge weighting of mall and retail REIT's, which are really too far removed from your goal. If you don't like shorting outright for fear of duration mismatch (GS, like any equity, could have a quick 20, 30, 40 or even 50% move higher unlike resi RE which doesn't get marked that quickly), buy some long-dated puts, with smaller capital outlays and better risk/reward since you'll prob be okay with a small (10-20%) decline from here but are looking to avoid the disaster scenario of down 30-50%..Stay away from SRS- it's a fraud, and my guess is that 2x inverse ETF's time on this earth is not long...

JPM=credit card exposure...served in the billions to the peasants by the kings advisor.

SRS? =250 by the Ides of March.

alright... I had to think about this for a few minutes... but unless you can somehow convince your brokerage to do a 10x leverage (or 20x or 100x... depending on how "good" an NINJA loan you gotz) and let you ride it out for 5yrs w/o a mark to market clause.. .there is no way to hedge Residential RE in NYC. Peace out!

That's why undercut the market and run for the hills...

Mr. Contraction knows smart money sold in 2007 or closed to sell in 08. Peasants holding in 2009 and expecting gain by 2019 should SELL SELL SELLL

My source is Mrs. LostDecade

We're not allowed to short any financials, as a condition of employment. Yes, would have loved to short GS and other financials, but couldn't do it.

My thoughts right now are to look more closely at Manhattan REITs, and perhaps short them.

Radar Logic has a NYC Condo index. you can call someone at Tradition Finance and see if you can short the index.

http://www.radarlogic.com/rpxtrading.html

Also- you can trade Case Schiller futures and options on the CME:

http://www.cme.com/trading/dta/del/product_list.html?ProductType=hng

Radar Logic even has Manhattan RPX indexes by neighborhood: UES, UWS, Soho/Tribeca etc. So theoretically one could create an even better hedge for his/her condo than simply shorting Manhattan condo index. The problem with hedges based on RPX forwards and total return swaps at this point is that heavy property price declines are already priced into the market. Thus in order to make money or offset some of the property value losses the real estate prices in Manhattan would have to decline more than current RPX market price is implying.
In any case, they have awesome historical data charts http://analytics.radarlogic.com/radar-logic-home/historical-data.aspx which show how strong Manhattan condo prices and volumes have been holding on so far versus spectacular falls in places like Miami and Vegas...