Another measure of the housing market began operating last week when trading in a new derivative known at the Residential Property Index, or RPX, got underway.
Created by Radar Logic Inc., New York, the index is based on single values representing price per square foot on actual residential real estate transactions in 25 metropolitan areas. Trading also will be available in a 25-city composite.
Dealers licensed to offer products in the RPX market include Morgan Stanley, Lehman Bros., Merrill Lynch, Deutsche Bank, Goldman Sachs and Bear Stearns.
Radar Logic, which bills itself as "the home of tradable real estate," is a technology-driven data and analytics business that produces a daily "spot" price for residential real estate in U.S. metropolitan areas.
At nearly $23 trillion, according to the latest figures from the Federal Reserve Board, the value of U.S. housing is significantly larger than that of stocks and rivals that of fixed income. But because of its illiquid nature, methods for investing and trading in real estate essentially have been limited to buying, holding and selling individual properties.
With the new derivative, however, investors will be able to take positions on the value of the residential property market, creating liquid and efficient opportunities similar to those available for more traditional commodities, said Radar Logic's president, Michael Feder.
"The launch of the RPX market provides both investors and participants in the real estate industry with sophisticated tools that have not been available to them before," Feder said. "The granular applications of the RPX-based derivatives should allow substantial utility for all interested participants."
The company produces daily prices for housing in the 25 markets by capturing actual transaction data and translating the information into the Radar Logic Daily Prices. The Daily Prices, in turn, power the RPX market, where derivatives and other financial instruments are offered and traded.
RPX allows real estate and financial professionals to manage risk, invest in real estate without owning physical assets, and obtain more accurate insight into the residential property market, the company maintains.
Tony Tufariello, global head of the securtized products group at Morgan Stanley, said the derivatives "should provide an essential and timely investment and risk management tool for our institutional and individual clients by offering them the opportunity to express a long or short view on home price changes across the U.S."
Scott Soltas, the managing director and head of Merrill Lynch Mortgage Sales and Trading, believes that at least initially, RPX trading will be centered around price return "swaps" and simple forward contracts.
Both instruments will be quoted in terms of home price appreciation (HPA) and will vary in length from one to five years. "The variety and flexibility provided by these contracts will enable investors to quickly and easily express views on specific property markets for their desired length of time," Soltas said.
Rich McKinney, head of Residential MBS Trading at Lehman Brothers, said investors holding securities sensitive to mortgage credit and prepayment performance as well as businesses with exposure to the housing market cycles can use these instruments to hedge their housing exposure.
"Given the current volatility in the housing market, the product launch is extremely well timed," McKinney said.
In addition to generating daily RPX prices, Radar Logic has developed a series of analytic tools designed to help professionals in both the real estate and financial services industries utilize these derivatives.