Now, every reader here knows I am bearish on housing for 2009/2010. But, a new ETF out there has my contrarian indicator on high alert.
From the WSJ:
MacroShares’ Major Metro Housing product, brainchild of economist Robert Shiller, will offer investors a way of betting on rising house prices by buying “Up” shares, or expressing pessimism via “Down” shares. Unusually, these won’t be backed with the underlying physical housing assets.
Instead, MacroShares will be tied to the Standard & Poor’s/Case-Shiller Composite 10 Home Price index. When the Up and Down shares float, proceeds will be invested in U.S. government bills to ensure liquidity. If the index moves up, the trust behind the Down shares will shift a corresponding portion of its assets to the Up shares trust, raising the net asset value underlying the Up shares. The prices should follow.
This seesaw structure dictates there always being an equal number of Up and Down shares. So if, for example, there is high demand for new issues of Down stock, not an unlikely scenario in today’s climate, an equal amount of Up stock will have to be created and sold into the market. In this scenario, Down shares ought to trade at a premium to NAV because of high demand, while Up shares would tempt buyers with a discount.
First, readers also know how we at ValuePlays feel about Case-Shiller and its flawed methodology.
The ETF also seems at first blush to be a way to increase the relevance of the index the ETF’s creators have it tied to (they are the same people)
BUT, now that the average Joe has an easy way to bet against housing, are we looking at the “last fools in” on the downside? Please note, under no circumstances do I think there is any “rally” happening in housing. In all actuality just price stagnation would be stunningly good news. Past real estate busts have taken the better part of a decade to come out of and this was worse than any of them, there is no price rally in store.
Could the “RE ETF” to the downside be the “Lair Loans” from the bubble? Time will tell.
Now, when you couple that with this little piece of news also from the WSJ:
Jumbo mortgages became more expensive and harder to come by as the nation’s credit crisis deepened. That might be starting to change.
“Jumbo” refers to mortgages that are too large to be bought by Freddie Mac or Fannie Mae. The “conforming loan limit” for those government-backed entities is $417,000 in many parts of the country, but goes up to $729,750 in high-cost areas of the continental United States.
Bank of America recently began trumpeting its jumbo program, offering 30-year fixed-rate jumbo mortgages with rates in the high-5% range. “We decided it was time to really go after that market,” says Vijay Lala, a product management executive for the bank.
Also:
The rates on 30-year fixed-rate jumbo mortgages averaged 6.5% for the week ended March 27 — the lowest since May 2007, according to HSH Associates, a publisher of consumer loan information. On Oct. 31, a recent high point, the average rate on a 30-year fixed-rate jumbo mortgage was 7.9%, according to HSH data.
GMAC also has been pricing its jumbos aggressively, says Paola A. Kielblock, national product specialist for Fairway Independent Mortgage, a mortgage broker and banker based in Madison, Wis.
She recently has seen rates in the high-5% to the low-6% range for 30-year fixed-rate jumbo mortgages, and the low-5% range for five-year adjustable-rate jumbos.
Bill Higgins, chief lending officer for ING Direct, says his firm has been offering jumbos in the 5% range for several months — even back when average rates were higher
I have claimed here for what seems an eternity that helping over-levered people 6 months behind on their mortgage was a waste of taxpayer money. Why? There is no economic impact to saving the home. John and Mary’s loan has reset and they are hopelessly underwater and cannot afford the loan. Forcing the bank to refi it only enables them to barely afford the loan. That is it. There is no discretionary income freed for other economic uses. Results from FDIC programs that show near 60% of these folks re-defaulting 6 months later would prove that point.
The argument is that saving the foreclosed homes saves property values. Bull, once the first home on the block (or near area) goes into foreclosure, homes 2 and up have no effect on pricing until #1 sells as that is now the low price. Since we know we cannot save every home because some people cannot afford their homes under any circumstances, saving the others in the area is wasting money and resources.
Fording them to foreclose and rent would actually free up more money for them to recycle back into the economy.
Jumbo loans. Today these are folks with high credit scores (>720), at least 20% equity in the home and higher incomes. Lowering their payment adds to their discretionary income that then gets recycled. I have argued that refinancing current loans at 4% to credit worthy borrowers would have more beneficial impact for the overall economy than just allowing someone to squat in a home.
Will this “save housing”? No. We could not build another house for a year and still have new home inventory unsold next April. Until that is fixed, prices cannot climb. It will though help the overall economy.
So, what does it all mean? The ETF? A piece of garbage. It will take at least a decade to recoup housing values in the hardest hit areas. Housing has collapsed and the easy money has been made for those who think further falls are in store. Not that is matters as the ETF isn’t even backed by actual home prices (unlike commodity ETF’s) but by the “feelings” of investors. Housing could rally or fall 20% but if investors do not rush to buy or sell shares in the ETF, the value of the investment remains flat. Contrarily, prices could remain flat but a rush of sellers could cause a long position to crater totally unrelated to housing prices. Nice…
Also, the folks at Macroshares have lousy timing with this type of investment:
When MacroShares first tried the structure tracking oil prices, the results were mixed. In its first outing, in 2007, the sudden rise in oil prices from $60 a barrel to triple digits caused it to automatically liquidate in the summer of 2008. In a seesaw structure, if prices move 100% either way, the net asset value of either the Up or Down shares must go to zero. This is by design, but some investors may be put off by the idea that returns are capped.
Final thoughts:
- Ignore the ETF
- Housing will not rally
- Giving current mortgage holders more discretionary income by lowering rates helps the economy
- Stable housing would be very good news…
