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Wednesday, April 2, 2008

Housing rises...hedge funds lose billions!

That's the next headline we might see...and the next bail out. In an interesting article on the Realty times Web site this morning it was pointed out that the head of "the real estate sky is falling society" - Robert Schiller (pictured on the left)- one creator of the widely reported S&P Case/Shiller Indices and author of the best selling book Irrational Exuberance, has a largely unreported vested interest in the bad news that he's been spreading. Shiller's Index reported a fall of 8.9% in home values across the U.S. last year, while other reporting agencies could find a decline no where near that number. Schiller is known in the press as "Mr. Bubble" for his pronouncements on the stock market and housing bubbles.

From the Realty Times article - Just to give you an idea of how much the Case-Shiller Indices differ from other traditional home sales compilations like OFHEO and the National Association of Realtors monthly indexes, consider this, says David M. Michonski, CEO of Coldwell Banker Hunt Kennedy in New York City, "OFHEO has been keeping a national index for years and publishes monthly a one inch thick book on housing prices. It says that in 2007 the average price in America was down .3% . Yes, that is three tenths of one percent, not Mr. Shiller's 8.9%. Compared to OFHEO Mr Shiller's index overstates the decline by 29 times or 2900%, not a small amount. The National Association of Realtors index showed a median 1.4% decline nationally after 64 years of uninterrupted gains. Compared to NAR's 1.4% median price decline, Shiller overstates the "freefall" by 6.3 times or over 600%.

So why would Schiller be so strident and apparently so wrong about the market? Because he makes money from the actions that are taken, based upon his report, according to the article.

The Case/Shiller Index is licensed by Macromarkets LLC. In partnership with the Chicago Mercantile Exchange, Macromarkets created the "Housing and Futures Options" for trading.
The CME Group, a Chicago Board of Trade Company, describes trading housing futures as having multiple benefits to investors:

A new means of risk transfer to a broad range of investors Low cost exposure to real estate values without direct ownership of properties Access to a unique asset class Opportunity to profit from a movement in housing prices A way to make trading in real estate a short-term and liquid investment This is a hedge product, folks, and guess who one of the owners of Macromarkets LLC is? None other than Shiller.

"Every time a CME hedge is made, revenue flows to Macromarkets," says Lawrence Yun, senior economist for the National Association of Realtors. "People would hedge only if they believe prices will fall big time." And guess who's running around yelling that the sky is falling - the same Robert Schiller. So, now hedge funds are likely making huge bets on further housing erosion, based upon bad data from Schiller's company. Next year they'll be asking to be bailed out from these bad bets; if housing, in fact, rises.

The article also tackles the issue that the press has apparently been a willing participant in this ruse, mainly because Schillers rantings make for good screaming headlines about how bad things are and it is a maxim in the the press - If it bleeds, it leads. The press loves bad news. They can run out and interview someone getting evicted from a house and make a whole big story out of it.

So, what's the real truth? Certainly, we have seen a value drop locally in housing. In our case we are down -15-20% from the highs of 2004-5; but, we are also starting to see things pick up and prices starting to stabilize a bit. we have a huge backlog of foreclosed homes to sell off, but actions by the Feds have helped slow the rate of new foreclosures. There is still a looming round of ARM resets that Fed actions may forestall or which will go on and happen this summer - we'll have to wait and see on that. Maybe Mr. Bubble can become one of the scrubbing bubbles and help clean up the mess that he's so widely and wildly reported.

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