Article - Four Ways to Hedge Against Falling Home Prices - Yahoo Finance

Here are four ways to hedge against falling home prices:
1. Wait It Out as a Renter
Forget the American Dream. Buying a home in a tanking real estate market isn't going to turn you into Andrew Carnegie any faster. Your best investment may be a rental.
If you already own a home and you intend to stay in it for years to come, of course, selling now probably doesn't make much sense: the commissions and fees of a sale can easily wipe out the gain. But if you don't own a home -- or if you're moving for other reasons -- these fees will be extra savings.
The long and short of it: rent paid may be money in the bank.

2. Play the Futures Market
The obvious hedge against falling home prices is to bet against the residential real estate market in your area.
In 10 major markets, the Chicago Mercantile Exchange offers housing futures and options that are tied to the S&P/Case-Shiller Home Price indices. Bearish investors can go short on securities and invest in the right or obligation to sell borrowed securities up to a later, specified date. If the security loses value, the investor gains money.
Theoretically, if you own a home and go short on the index, should the real estate market in your area plunge, your house will lose value, but the loss will be offset by a gain in the futures market. Conversely, if the market does well, your home will increase in value, and you'd lose on the futures investment.

3. Take Out Home-Equity Assurance
A select few of those looking for more direct protection have another option: a handful of cities -- including Syracuse, N.Y., Florissant and Ferguson, Mo., and parts of Chicago -- offer home-equity assurance programs.
Though home-equity assurance programs work differently, they typically appraise a house when a homeowner registers for the program, and then pay the homeowner the difference if the house sells for less than the appraised value or if neighborhood property values fall.

4. Engage in Short-Selling
For those who don't live in cities with protection plans -- or who simply didn't enroll in them -- and who find their home loans worth more than their home, there may be another option: the short sale.
Short-selling houses has one major advantage to short selling stocks: there's no downside risk. Arranged properly, the lender, not the borrower, takes the loss.
In a housing short sale, the borrower sells his house for less than the amount of the mortgage, takes a hit on his credit report, and moves free and clear of any housing debt.
If it sounds like there must be a doozie of a catch, there is.
Lenders must agree to the short sale. And typically they'll only do that if the house is at risk of foreclosure, and they believe a short sale will be more cost effective.

But though some homeowners may be able to mitigate their losses, others can do nothing but wish they had bought into the market at a better time.
"If you buy an asset and the value declines you've taken a loss," says Miller of Sensible Financial. "There's no undo button."



Link to the article: http://finance.yahoo.com/real-estate/article/104493/Four-Ways-to-Hedge-Against-Falling-Home-Prices;_ylt=AvYxL9_zoLRF17BmAIhGwaK7YWsA