Shiller on Housing Speculators: If You Can't Beat 'Em, Join 'Em

Yale economist and financial commentator Robert Shiller, author of Irrational Exuberance, deserves credit for predicting the bursting of the housing bubble. Shiller has frequently lamented the increasingly speculative nature of U.S. housing -- and rightfully so.

Most recently, in a Bloomberg interview on August 5th, Shiller pointed out that the U.S. housing market has become more speculative and more unpredictable over the past decade. Despite Shiller's criticism of the speculative nature of residential housing, Shiller recently moved to capitalize on this trend via two newly launched exchange-traded vehicles.

Robert Shiller has been a driving force behind two exchange-traded vehicles launched on June 30th: MacroShares Major Metro Housing Up (UMM) and MacroShares Major Housing Down (DMM). Shiller is co-founder of MacroMarkets, a private company that is behind the MacroShares products, which essentially represent leveraged bets on housing prices, as tracked by the S&P/Case-Shiller Composite-10 Home Price Index. With an annual expense ratio of 1.25%, the vehicles are not exactly Vanguard-style low-cost index-tracking devices. The hefty expense ratio has come under intense scrutiny recently, but Shiller has defended it in an interview with TheStreet.com.

How do UMM and DMM actually work? They hold no shares of home builders such as Centex (CTX), DR Horton (DHI), Lennar (LEN), or MDC Holdings (MDC). They also don't own any actual houses. Instead, it appears that "investors" buying into UMM are essentially betting against "investors" in DMM. When one set of speculators wins, the other loses, and value is transferred from one vehicle to the other.

We commend Shiller for lamenting the speculative nature of housing, as the latter has contributed greatly to the recent bust. We also don't fault MacroMarkets for cashing in on demand for products that allow investors to speculate on housing prices. However, we find it ironic that Shiller would endorse the launch of vehicles whose ultimate effect may be to make the U.S. housing market even more speculative than it is already.

Perhaps Shiller's stance toward housing speculators simply reflects the old adage, "If you can't beat 'em, join 'em."

Disclosure: No positions.

Comments

[Roger Knights:]

"we find it ironic that Shiller would endorse the launch of vehicles whose ultimate effect may be to make the U.S. housing market even more speculative than it is already."

On the contrary, if these vehicles had existed earlier, housing-price speculation would (in part) have been diverted into a vehicle where a bubble would have been far less socially destructive.

And of course there's a great social benefit in enabling a nervous or cautious potential home-buyer to acquire a house during a bubble and be hedged against a decline. And it would allow a cautious or far-sighted home-owner to lock in his equity during a bubble.

Further, if lots of such home-owners go "short" it will indirectly dampen the excess. It's not just gambling; there's a beneficial real-world feedback process at work.

There was an even worse article--one of the worst I've seen on SA--lamenting the Shiller product here. There are, toward the end, some very critical-of-the-critic comments:

seekingalpha.com/artic...

Aug 06 09:08 AM

[Roger Knights:]

PS: Far fewer homeowners would be underwater today if these products had been available and they'd been able to hedge with them. As a result, there'd be less systemic risk to the banking system.

Aug 06 09:10 AM

[Tony Petroski:]

This type of arrangement ends with both funds losing money. Wait for the first reverse share split.

Aug 06 09:25 AM

[evergreen16:]

wow - what an idea, what a rip off.

Aug 06 12:36 PM

[Mad Hedge F...:]

Join them in bankruptcy court. Deutsche Bank has put out a report on residential real estate that will raise the hair on the back of your kneck if you still own your own home. Prices have not hit bottom and have another 14% to fall by 2011, putting in a 42% fall from top to bottom. By then, almost half of all mortgage holders in the US will be underwater. The top underwater cities in the US is not good news for the Land of Fruits and Nuts, where lending was the most aggressive and imaginative:

Merced, CA 85%
El Centro, CA 85%
Modesto, CA 84%
Las Vegas, CA 81%
Stockton, CA 81%

The murder weapons in these nearly home equity free cities break out as the following:

Option ARMS 89%
Subprime 69%
Alt-A 66%
Jumbo 46%
Conforming 41%

These forecasts tell us that a second stimulus package is a sure thing, that unemployment will soar over 10%, and that a “W” shaped recession is a lock. Gee, do you thing the stock market might go down on this?

Aug 06 04:33 PM

[mr. mann:]

the product does increase speculation. you don't understand it.

Aug 07 12:54 PM

[ilovesum:]

talk about shiller spewing manure then selling it ,
can i get a truck delivered?

Sep 02 11:09 PM