Sunday, May 14, 2006

S&P CME Housing Futures and Options

John at MightyBargainHunter is talking about these new housing futures that according to this MSN article are to debut tomorrow. John was not so warm about them as they were obviously not intended for the average home owner. I agree with that 100%. I further predict that mortgate lenders with overexteded loan portfolios and large MBS investors will be among the ones most interested in these products early on.

After a little more thought and asking myself who's going to take the other side of the trade, my mind has changed to, like, "oh my god, what were they thinking!". You see, home buying is a terribly inefficient process, even more so in a slow market like today's. Buyers are still hopeful for the price their neighbors got six months ago; sellers are eyeing the growing inventory; and inbetween the agent is waiting for a large commission. Obviously, futures and options have none of that, which means the "price discovery" mechanism works much faster. In a down market, it will not change the terminal price per se, but will certainly accelerated the bottoming process. I just don't know if our present system can take this jolt.

If LA home owners wake up tomorrow to find a 15% home price reduction in 1 year baked in the cake, how will they react?

Last time I looked at BZH (Beazer Homes) which I'm shorting, I thought a short term target would be in the $52 range. I was planning on covering and re-entering later. It seems I need to rethink that strategy.