Are Shiller real-estate futures and options catching on with investors?
"The Case-Schiller macro derivatives market has seen very minimal activity.  For example, in the  three regional markets of San Diego (SDG), Boston (BOS) and Los Angeles (LAX) on 28 November 2011, there was zero trading volume, no trades settled, no open interest.  * Source: CME Futures and options activity[PDF] for all 20 regional indices.  Why haven't these real-estate futures caught on with investors?  Keep in mind that the CME introduced these indices, with support from Professor Shiller and partner Standard & Poor's several years ago. The CME seems committed to wait this out, as they have shown no indication of dropping the Case-Shiller indices. There are alternative real-estate investment securities to the Case-Shiller indices.  I don't think the market of investors is so small that Case-Shiller has been, in effect, ""crowded out"" by them. I think it is more likely a matter of known quantities. Also, I don't know how well these alternatives are doing! Additional reference: CME spec's for Case-Shiller index futures and options contracts." "In my experience, Shiller is always way before his time with his predictions and often it comes at too early a point for anyone actually making some money to care about. His view is very long term - and I trust his predictions, because he so accurately predicted so many of the homepocalypse, and the measures that would follow. He even predicted that there would be bailouts in his book ""Irrational Exuberance"".  His opinons were poo-poo'd as doom and gloom and manipulative until every piece started falling apart in the specific order of events (give or take) that they did.  I personally think people like Dr. Shiller make bold predictions that are hard to swallow. The derivatives market is a bit skittish about rolling into bull territory with any kind of housing index, but Warren Buffet's old adage to ""buy when everyone is selling and sell when everyone is buying."" (paraphrase). I see this as a good long-term investment because I trust Shiller's judgement, he stuck to his guns when the doubts were lobbed at him incessantly  (and Krugman, et. al. to some extent), and he turned out to be more than vindicated.  To me, these kinds of sources are usually pretty sound. The man knows what he's talking about, and I wouldn't mind picking up a piece of that action, especially if the market just doesn't trust any real estate investments. It's pretty easy to realize that right now housing will be undervalued and now that mortgage applications are (supposedly) stricter, I think there's a good argument to be made that this economist should continue to exceed expectations."
Are things getting better yet or are things still a mess? I have heard people say that right now is a 'good' time to take out a   loan, and that it is a buyer's market in real estate. Something to consider here is what intentions do you have for the real estate you'd buy.  If you intend to sell quickly, then selling into a buyer's market doesn't sound like a great idea.  While real estate may be cheap, there can be the question of how long do you think this will last?  How much of a burden on time and energy are you expecting to take if you do switch residences or buy an investment property? But more specifically, are there any hidden details that come with   taking a loan out when interest rates are low that I should be aware   of? I'd be careful to note if the rate is fixed for the entire length of the loan or does it adjust over time.  If it can adjust then there is the possibility of those adjustments going up. "Probably but not necessarily.  Your question could also be posed regarding cash & carry for commodities in contango: If I can take delivery on the gold now, short the gold next year and make delivery then, paying the storage fees, is this an arbitrage opportunity? It is in the sense that you know your delivery and the money you will make, but it's not in the sense that until delivery (or execution in the options case) you are still on the hook for the margins due from price fluctuations. Additionally you need to consider what ROI you will make from the trade. Even though it's ""guaranteed"" it may be less than what you can earn from other ""zero risk"" opportunities." This fortune article is referenced in his either 2003 or 2004 annual report in which he does say that the market will not likely return much in the future and generally talks numbers. I am also a value investor, such that I can be in this environment and believe there is a bit of value in knowing where you think the market is headed but the real value is in underwriting each deal. In long, I agree with you You seem to underestimate the risk of this deal for the inverstors. A person purchasing a residence is happy to pay $70K instead of $150K now, and the only risk they take is that the construction company fails to build the condo. Whatever happens on the estate market in two years, they still saved the price difference between the price of complete apartments and to-be-build apartments (which by the way may be less than $150K-$70K, since that $150K is the price on a hot market in two years). However, an investor aiming to earn money counts on that the property will actually cost $150K in two years, so he's additionally taking the risk that the estate market may drop. Should that happen, their return on investment will be considerably lower, and it's entirely possible they will make a loss instead of a profit. At this point, this becomes yet another high risk investment option, like financing a startup. "There's a market for single stock futures.  The market (however small) is OneChicago, ""an Equity Finance Exchange offering security futures products.""  I don't know how easy access is for retail investors." Look into commodities futures & options. Unfortunately, they are not trivial instruments. Just short GS.  http://www.google.com/finance?q=gs  Much more fun.  That list looks like a global macro short list. Shorting XOM, JNJ are systemic risk plays.  The guys that stand out for specific risk: INTC AMZN ABT LMT BMY  AMGN  CMG AVB, I stopped reading after that.  fundamentally I would long INTC as them and AMD are the market for CPU's. Maybe people are betting against pc's...   AMZN has a retardedly high facebook like P/E.  I don't know enough about most of the risk. "VNQ only holds ~16% residential REITs. The rest are industrial, office, retail (e.g. shopping malls), specialized (hotels perhaps?) etc.  Thus, VNQ isn't as correlated towards housing as you might have assumed just based on it being about ""real estate."" Second of all, if by ""housing"" you mean that actual houses have gone up appreciably, then you ought to realize that residential REITs seldom hold actual houses. The residential units held tend primarily to be rental apartments. There is a relationship in prices, but not direct." Thanks. Just to clarify I am looking for a more value-neutral answer in terms of things like Sharpe ratios. I think it's an oversimplification to say that on average you lose money because of put options - even if they expire uselessly 90% of the time, they still have some expected payoff that kicks in 10% of the time, and if the price is less than the expected payoff you will earn money in the long term by investing in put options (I am sure you know this as a PhD student I just wanted to get it out there.)I guess more formally my question would be are there studies on whether options prices correspond well to the diversification benefits they offer from an MPT point of view. "Due to the zero percent interest rate on the Euro right now you won't find any investment giving you 5% which isn't equivalent to gambling.  One of the few investment forms which still promises gains without unreasonable risks right now seems to be real estate, because real estate prices in German urban areas (not so in rural areas!) are growing a lot recently. One reason for that is in fact the low interest rate, because it makes it very cheap right now to take a loan and buy a home. This increased demand is driving up the prices. Note that you don't need to buy a property yourself to invest in real estate (20k in one of the larger cities of Germany will get you... maybe a cardboard box below a bridge?). You can invest your money in a real estate fund (""Immobilienfond""). You then don't own a specific property, you own a tiny fraction of a whole bunch of different properties. This spreads out the risk and allows you to invest exactly as much money as you want. However, most real estate funds do not allow you to sell in the first two years and require that you announce your sale one year in advance, so it's not a very liquid asset.  Also, it is still a risky investment. Raising real estate prices might hint to a bubble which might burst eventually. Financial analysts have different opinions about this. But fact is, when the European Central Bank starts to take interest again, then the demand for real estate property will drop and so will the prices. When you are not sure what to do, ask your bank for investment advise. German banks are usually trustworthy in this regard." My 2 cents:As I understand it, stochastic math doesn't seem to cut it for pricing derivatives. Ito's Lemma and Feynman-Kac SDE solutions both impose constraints on higher order moments of the PDF. So you can't just drop in your forecasted return distribution and get a price. All the fixes seem somewhat ad hoc. Shit gets real when you move from options to their first cousin: term structure of interest rates. The Heath-Jarrow-Morton framework was intractable in the original paper, but there are some promising simplifying assumptions. I think there's real money there for someone who works that out and comes up with new arbitrage possibilities. On the other hand, you get some phenomenally bad math like the Gaussian copula that was used to value the subprime tranches and bring them a mind-boggling AAA rating. A lot of folks here do fancy nonlinear time series analysis to forecast the 1st, 2nd &amp; higher moments of asset returns. Not a lot of theoretical basis (well neuroscience), but if you can do it better you win. "One way to ""get into the real estate market"" is to invest your money in a fund which has its value tied to real estate. For example, a Real Estate Investment Trust. This fund would fluctuate largely inline with the property values in the area(s) where the fund puts its money. This would have a few (significant) changes from 'traditional' real estate investing, including:" If your planning on shorting the stocks be careful, while the value of the retail sector may be declining there will be a lot of back and forth over the next ten years, and as REITs discounts to nav increases, there is huge opportunities for buyouts from developers who have other use ideas for the real estate. The real estate will always have value, even if it's not as a shopping center. Ok, see that was my thinking too.  Historically, stocks and land values have always gone up, even after the depression.  So, it seems to me, that if you have a buy and hold strategy with a horizon of 10-20 years, then you should be fine.  Is my thinking realistic along those lines? "I think anyone who is seriously contemplating a real estate purchase needs to sit down and read some history -- in particular the accounts of the 1930's and what happened to people who jumped into real estate in the midst of the depression.    If you're not aware: by and large, what happened is they lost their asses: the property continues to fall in value, and then they're on the hooked for increasing taxes as local and state governments raise taxes in a desperate attempt to plug budget holes.  And, of course, interest rates are headed nowhere but up.  That will inversely impact your home's value, given that most people buy homes exactly like you're thinking about them: not how much the home is worth, but rather how much payment can you afford (as rates go up, you can afford less).  A contemporary piece which has lots of accounts of this over multiple years is [The Great Depression - A Diary](http://www.amazon.com/The-Great-Depression-A-Diary/dp/1586489011).  IMHO real estate is to be avoided until well after a bottom has been reached, and that's IMHO still some years away.  Someone coming out of college now should ferret away as much money as possible, live as cheaply as possible, and stay far, far away from thoughts of ""gee, it sure would be a good idea to go drop half a million dollars on a house when I'm making $70K.""  While you're predicting raises and employment, neither is safe to take for granted.  Indeed, many folks thought that in the late 00's and got absolutely destroyed financially as a result."