In what might be one of the more audacious examples of the real estate frenzy gripping the United States, a California-based Internet company is allowing participants to gamble on the direction and magnitude of home prices.
HedgeStreet Inc. has launched trading in six new “hedgelets” grounded in the price of houses in Miami, Chicago, New York, Los Angeles, San Diego and San Francisco. The company says more markets are on the way.
Participants can begin betting by opening an account for as little as $100.
So far, players in five of the six real estate markets are leaning toward higher prices, while those betting on New York expect flat to lower prices.
“There is a huge built-up risk, huge exposures in this asset class,” says Russell Andersson, a vice president at the San Mateo, Calif., company.
Each hedge contract is based on the median price of existing single-family homes for the particular metropolitan area, a figure that HedgeStreet gets from the National Association of Realtors, or NAR.
The most basic hedgelet is a yes/no proposition on whether the median price will rise or fall in the next NAR quarterly report.
On the pages devoted to the Miami house hedgelet, for example, a player learns that the median price at the end of first quarter was $315,700. The next report, due out Aug. 11, is the basis for current trades.
The Miami market’s players are saying there is a 60 percent chance that the South Florida city’s median price will rise above $325,000 for the second quarter and thus a 40 percent chance of a lower number.
If someone bets “yes” and puts $500 where their mouth is, they stand to gain $330.
For each contract, a “hedgelet calculator” allows visitors to plug in their potential bet and see what the payoff would be.
In addition to the yes/no option, there also is a variable one where a player can move the expected price point for real estate in a given market up and down on a thermometer-like scale. Moving the point changes the odds with riskier bets returning more.
Each contract has screens where you can see what traders are willing to pay to buy or sell contracts, and how many contracts are actually outstanding.
While HedgeStreet might smack of gambling to some, the company won approval from the federal Commodities Futures Trading Commission last year as a contract market and registered clearing organization for futures contracts.
Futures trading is a multi-trillion-dollar global industry in which financial institutions, producers, and, yes, speculators take both sides of thousands of time-limited propositions, such as the price of oil and other commodities, the price of stocks and stock indexes, even whether Chicago will have a hot summer or a cold winter, measured in degree-days.
HedgeStreet is different in that a participant can open an account with only $100. Participants can only lose the amount that they post. They are not subject to margin calls — a request from a brokerage firm to a customer to bring margin deposits up to initial levels — as they might be in futures trading.
When HedgeStreet launched last fall, it tried using a set of housing price indexes for individual metro areas provided by the government, but found no takers.
“We got the feedback that people would very much like real dollar prices,” HedgeStreet spokeswoman Ursula Burger said, explaining the shift to the NAR figures.
Right now, there are very few participants, and HedgeStreet declines to give out volume figures. The company admits its portion of the market is still minuscule compared to standard futures contracts on the more established exchanges.
The company launched its services in October, and offers a variety of hedge contracts. In the energy department, you can gamble on the future price of gasoline, natural gas, or crude oil.
Back in real estate, there are bets on the future course of mortgage rates, both one-year adjustable rates and 30-year fixed.
Gold and silver are represented, as are currency pairs involving the U.S. dollar and the euro, the British pound, and the yen.
Players can also use a HedgeStreet account to bet on the next Consumer Price Index number from the government, initial claims for unemployment or nonfarm payrolls, or retail sales.
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