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Shiller: People Should Hedge Against Home Price Declines

By    |   Tuesday, 17 May 2011 08:38 AM

Investors have figured out all kinds of different hedges to deal with the risk of decline in their paper assets. But they haven’t done much to hedge against the possibility of price declines in their own homes, The Wall Street Journal reports.

Home prices have plunged for the past four years, and the end may not be in sight. "A 30-year decline in home prices (adjusted for inflation) is certainly a possibility," Yale University economist Robert Shiller tells the newspaper.

So there is certainly reason to hedge, and several organizations have made efforts to provide hedging mechanisms. Home HeadQuarters, a nonprofit organization, offers insurance against home-price decreases in Syracuse, N.Y.

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Robert Shiller
(Getty Images photo)
The insurance costs just 1.5 percent of the protected value and lasts up to 30 years. But the group has sold only 150 insurance plans since 2003.

The Chicago Mercantile Exchange offers futures contracts on home prices in 10 metropolitan areas, including Boston, Miami and Las Vegas, inspired by Shiller’s work. But trading is negligible.

Shiller doesn’t understand why homeowners don’t take advantage of hedging opportunities.

"People know they are overexposed," he tells the Journal. "Why they don't hedge the risk puzzles me."

With, the S&P/Case-Shiller home price index dropping 3.3 percent in February from a year earlier, there seems to be plenty of reason to hedge.

“Housing will continue to lag the recovery until foreclosures abate,” Sal Guatierei, a senior economist at BMO Capital Markets, tells Bloomberg.

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Investors have figured out all kinds of different hedges to deal with the risk of decline in their paper assets. But they haven t done much to hedge against the possibility of price declines in their own homes, The Wall Street Journal reports. Home prices have plunged for...
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Tuesday, 17 May 2011 08:38 AM
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