Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks

By Robert J. Shiller | Go to book overview

5
Real Estate and Other Markets

There are other income factors, besides the aggregate national income and labor income factors, that contribute as much uncertainty to the incomes of individuals and organizations as do many risk currently traded in financial markets. If those who retail insurance policies against risks of changes in values of claims on incomes or service flows are to be able to tailor their insurance to the various exposures that their different clients have to these risks, they will want to lay off in hedging markets the risks of changes in these income factors that influence them because they are providing the insurance policies. This chapter indicates some of the most salient of these other markets.

Several such markets will be considered here--real estate, unincorporated business, privately held corporations, consumer and producer price index components, and art and collectibles--as well as some thoughts on how we might go about systematically looking for the major risk factors to incomes for which new markets would be most useful.


Real estate

There is a substantial industry devoted to insuring real estate against physical damage, but there remains virtually no way for people to insure or hedge the risk of declines in value of real estate holdings. Portfolios of real estate tend to be highly undiversified, concentrated in small regions, and so people and organizations are accepting substantial risk of local real estate price fluctuations. Those who lend to property owners are also vulnerable to such risks, as are holders of real estate mortgages and mortgage-backed securities, and private mortgage insurers.

In the United States in 1990 the value of residential real estate was, according to estimates, $6.1 trillion and of commercial and industrial real estate $2.7 trillion. 1 These estimates put the value

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Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks
Table of contents

Table of contents

  • Title Page iii
  • Preface v
  • Acknowledgements x
  • Contents xiii
  • 1 - Introduction 1
  • 2 - Psychological Barriers 17
  • 3 - Mechanisms for Hedging Long Streams of Income 31
  • 4 - National Income and Labor Income Markets 52
  • Appendix to Chapter 4: Econometric methods 72
  • 5 - Real Estate and Other Markets 78
  • 6 - The Construction of Index Numbers for Contract Settlement 116
  • 7 - Index Numbers: Issues and Alternatives 152
  • 8 - The Problem of Index Revisions 182
  • 9 - Making It Happen 201
  • Notes 215
  • References 228
  • Author Index 241
  • Subject Index 245
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