Making Money on Falling House Prices

Human beings are certainly creative. We even find ways to make money on falling prices.

This weekend, I read about a new speculative investment which will be making its debut on the Chicago Mercantile Exchange in the spring of 2006. And this new investment? Housing price futures. These futures will be based on the median home price in each of 10 US cities. While this isn't an investment type for the regular residential homeowner, it may provide some protection for those in the housing industry, such as mortgage companies, home builders and other big players in the investment arena.

How do housing futures work? If you are confident of rising home prices, you simply buy "contracts". You'll make a profit if the increase in the contract exceeds your costs by the expiration date. However, if you think the housing market is going to tumble, you can buy something called a "put option" which will pay money if prices drop.

While this kind of investing is certainly not for the faint of heart, it could be an interesting way to benefit even in a market which is slowing and stalling.

Which brings us to a question: Is the market slowing and stalling? There are still voices on both sides of the question. However, as in all things, housing markets tend to cycle. Are we at the top of the cycle, or somewhere on the uphill climb? Only hindsight will tell for sure. But I've read some analysts recently who think that November 8th, 2005 may have been a key date. Why? A large group of housing market related stocks all took double digit drops on that day, and some big housing builders are predicting slower housing starts and sales.

As for me, I'll keep paying my mortgage down and I'll keep watching the news. Good interest rates are still to be had, but I'm not quite ready to lock in yet. We just got an "open" mortgage which allows us to put down money whenever we want. Even though our rate will be adjusting as the interest rate rises, we're planning on saving our interest dollars in lump sum payments. While low interest is definitely good, sometimes you have to play the market to your best advantage at the time. For us, that means some big lump sum payments while we can afford it.

Michael

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