Case-Shiller Housing Index Through April 2009

There is great variability between the cities.  Here are the results for each city in the index:

It would be great to hedge the value of your house so that further declines would be made up by an increase in a security. Well, MacroShares launched two Exchange Traded Trusts on 30th of June that track the ten city composite.

Or do they?

MacroShares Major Metro Housing Up (UMM) and Major Metro Housing Down (DMM) return three times the index and minus three times the index. But not month to month. They are designed to return the given multiple of the index in November 2014. Until then, they will fluctuate depending on investor sentiment.

Another interesting feature is that they transfer money between themselves based on the relative price. As more money comes into the funds, they buy Treasuries that they transfer depending which Trust is higher.

If they had launched in 2006, DMM would already be shut down, because the 10 city composite peaked at 225 and now it is at 150.  A 1/3 drop wipes out the Trust.

Because the trusts move to plus and minus three times the Case-Shiller index in five years, they can be used as a five year hedge for your house value.  If you sell your house before then, there is no guarnatee that the Trusts will reflect the change in housing prices.  They act like a warrant, trading on what investors expect housing prices to be on 31st August 2014, payable in November 2014.

With the collapse of the market in November 2008, strong companies like Vornado (VNO) were paying out seven to eight percent. Simon Property Group (SPG) another strong company, was paying out similarly. We discussed income stocks briefly in a previous post on dividend payers.

Now credit is tight, even for good companies with strong assets.  If a REIT needs money, they can sell a building or shopping mall.  The problem is that real estate values are low now so the trusts don’t want to sell.

In December the IRS ruled that REITs could pay up to 90% of their required dividend payments in stock.  Vornado announced in January that it would pay 60% of its dividend in stock, and last week Simon Property Group said that they would pay 90% of its dividend in stock.

This is theft.

If they are paying in stock, they are not paying.

Think of the stock of a company as a cake.  Say you cut the cake into twenty slices and give everyone at the party a piece. Then each person at the party has 1/20th of the cake.  If instead, this works well with three year olds, you cut the cake into 40 pieces and give everyone one piece, you have given out half the cake.  After a half hour, you give everyone a dividend, another piece of cake.  They have had two pieces of cake, but still only 1/20th of the cake.  The dividend gave them nothing extra.

In the same way, if a company has 100 shares of stock held by the public and it gives a “dividend” of 10 shares,  it has just reduced the size of each share by ten percent because it has divided up the company into ten percent more shares.

Avoid REITs.