Money Stuff: Predict Your House Price

A typical middle-class American’s two most valuable assets are (1) her human capital and (2) her house. Maybe (3) her stock portfolio. You can do a lot of stuff with your stock portfolio: You can sell some stocks and buy different stocks, you can diversify and hedge and trade actively and YOLO zero-day options on meme stocks. There is a huge industry — “the financial industry” — in which thousands of professionals get paid a lot of money to come up with stuff for people to do with their stock portfolios.

Those professionals sometimes get to thinking. “A typical middle-class American’s two most valuable assets are (1) her human capital and (2) her house,” they think. “And yet they can’t trade those. They can’t hedge them. They can’t diversify them. They can’t YOLO zero-day options on memified versions of them. Seems wrong. Maybe we could help, for a fee.” If they think about this long enough, they tend to launch one of two companies:

1. “Our company will let people sell shares in themselves,” or
2. “Our company will let people sell shares of their house.”

People are constantly having these thoughts, and always think they are the first. I wrote in June:

“The great late-night dorm-room question of financial capitalism,” I have called the first thought, in part because selling equity in yourself is mostly a way to replace student loans; the second thought comes later (when you buy a house). What is great about these thoughts is that everyone has had them, but only at most, what, 500 people have started companies to address them? We have talked about the first question any number of times, because people keep starting businesses of the form “you can sell stock in yourself.” We have talked about the second question fewer times, but not none. There have been some businesses of the form “you can sell stock in your house”; we talked in 2016 about one called Point, which as far as I can tell still exists.

At the time, I was writing about a new, crypto-y sell-stock-in-your-house company called Horizon. Yesterday, as it happens, I got an email from another one, Beeline, with the standard no-one-has-done-this-before pitch: “Until now, the only way to tap into your home’s value was to refi or sell. … Now you can sell a slice of your home’s equity.” Etc. [1]

One version of this is “you should be able to get money for groceries by selling a share of your house,” but another, perhaps more theoretically appealing version is “if your biggest asset is your house, [2] you should be able to diversify that risk: Instead of owning one house in one particular location, you should own small shares of lots of houses in lots of different locations.” Or: “You should be able to hedge that risk, by owning one particular house in a particular location and also shorting housing prices in that location.” If you live in a town where the factory closes and everyone loses their job, (1) you will lose your job, (2) you will need to move, (3) your house will be worthless because no one wants to move in and so (4) you won’t be able to raise money to buy a new house somewhere with jobs. If you could hedge that risk by (1) selling 90% of the economic ownership of your house and (2) using the money to buy economic ownership of housing in other, possibly more dynamic housing markets, you would be better off. Etc. [3]

That version does not require anyone to actually sell equity in their own houses. Some sort of housing derivative product would be enough. If you could sell cash-settled futures on average home prices in your town, and buy cash-settled futures on average home prices in a diversified index of other towns, you could accomplish a lot of the hedging you’d want. [4]

And so people propose that from time to time. Most famously, Robert Shiller proposed “Derivatives Markets for Home Prices” in a 2008 paper, and there are actually tradeable futures and options on the Case-Shiller home price indexes, though they don’t trade that much and are certainly not a popular retail hedging product. Economists and financial technology founders love love love the idea that people should trade house-price derivatives to hedge their housing risk, but empirically people don’t seem to be that into it.

But then, a few years ago I might have said “certain sorts of libertarian economists and crypto founders love the idea that people should trade prediction contracts on geopolitical events, but empirically people don’t seem to be that into it,” and boy has that changed! Now prediction markets like Kalshi and Polymarket are huge businesses, and while a lot of that is sports gambling, it’s not all sports gambling. Sports gambling has attracted a lot of gamblers, but some of them stay to bet on, like, coups in Latin America or the Nobel Peace Prize winner. 

But prediction markets are arguably a more general-purpose technology than that. They are sometimes called “event markets,” and their stereotypical use involves binary bets on yes-or-no outcomes: You get $1 if the Bills beat the Jaguars and $0 if they don’t; you get $1 if María Corina Machado wins the Nobel Peace Prize and $0 if she doesn’t; you get $1 if Maduro is deposed this month and $0 if he isn’t. But that mechanism can be roughly translated into any sort of bet on any sort of financial quantity.

For instance: If you own a portfolio of Labubus, you might want to hedge your Labubu price risk. If you could sell cash-settled futures on a diversified index of Labubus, you might do that. Seems hard, though. But as we discussed in November, Kalshi launched a series of event contracts on things like Labubus and sneakers: You can buy or sell a contract like “the average price of this series of Labubus will be above $120,” or $110 or $130 or $140, and the trading prices of those binary contracts can be combined to get something like a market-implied futures price of the Labubus. Also, of course, if you own some Labubus and want to hedge, you can just sell a bunch of the “above $120” contracts or whatever, and if the price of Labubus settles below $120 you get cash. Not a perfect hedge, and, as I wrote at the time, something more linear would make more sense, but it’s something. And, crucially, it’s something you can do on a gambling site that you’re using anyway. 

And if it works for Labubus:

Parcl, the real-time housing data and onchain real estate platform, and Polymarket, the world’s largest prediction market, today announced a partnership to bring Parcl’s daily housing price indices to a new suite of real estate prediction markets on Polymarket.

The partnership will introduce housing-focused markets that settle against Parcl’s published price indices, giving traders and analysts an objective, data-driven reference point for forecasting where home prices are headed. Polymarket will list and operate the markets; Parcl will provide independent index data and settlement reference values designed for transparent verification.

Housing is the largest asset class in the world, but it’s still hard to express a clean view on price direction without taking on property-level complexity, leverage, or long timelines. [5] By combining Parcl’s daily indices with Polymarket’s event-market structure, the partnership offers a simpler way to trade housing outcomes, with clear settlement rules and public, auditable resolution data. …

Initial markets will focus on major U.S. housing markets with a roadmap to expand coverage over time. Market templates will include questions tied to index movement across defined periods, such as whether a city’s home price index finishes up or down over a month, quarter, or year, as well as threshold-style outcomes that settle against published index values.

Will ordinary Americans use prediction markets to hedge and diversify their housing market risk? Again, the empirical evidence from the last few decades of house-price derivatives markets is “absolutely not,” but that was before prediction markets were a thing. Now, who knows, maybe.

Elsewhere, Bloomberg’s Emily Nicolle, Denitsa Tsekova and Lydia Beyoud have a big story on the rise of prediction markets:

And so the pitch goes, across Wall Street and Silicon Valley, day after day: Prediction markets represent nothing less than a rebuilding of capitalism from the inside out. What they possess, their promoters say, is an unprecedented ability to churn out intelligence on everything from corporate power struggles to geopolitical standoffs, like the one that triggered the toppling of Venezuelan President Nicolás Maduro — and a windfall for one gambler who placed a series of well-timed bets.

The raw gambling mania underpinning it all, the founders say, is not some dangerous vice that needs to be kept in check. Rather, it’s the secret sauce that Polymarket and Kalshi — the industry’s pioneers — are harnessing at massive scale, around the clock, to deliver an information hack for the modern economy. ...

Yet that high-minded vision masks a more awkward reality.

For every contract tied to a war or an election or a storm, there are scores hinging on whether the Atlanta Hawks beat the New Orleans Pelicans on Wednesday night, what South Park characters will say in the next episode, or whether Jesus Christ will return in 2026. (Those who bet against the Lord’s return in 2025 cashed in last week.) …

“It’s in their interest to convince us that this is going to be an enormous social good,” said Ken French, an influential financial economist at Dartmouth’s business school, whose work helped shape modern thinking about efficient markets. But as French sees it, the exchanges encourage zero-sum financial decisions with little benefit for the broader world. “The markets that you’re talking about, much of it is creating risk that doesn’t have to be borne.”

French’s take strikes me as basically correct, now. But … maybe? One story that people sometimes tell about Robinhood Markets Inc. is that it attracted young customers by letting them gamble on meme stocks, and as they have grown up now it helps them invest responsibly for retirement. (“Day trading meme-stock options is a gateway drug for sensible retirement investing,” as I once put it.) Maybe prediction markets will have a similar arc? You draw people in by creating risk that doesn’t have to be borne (will the Hawks beat the Pelicans), and then you end up helping them hedge their houses.

Venezuela has a lot of gold and oil. In the 1990s and early 2000s, various US and Canadian companies operated gold mines and oil reserves in Venezuela. In the 1980s and 1990s, the Venezuelan state-owned oil company, Petróleos de Venezuela S.A. or PDVSA, acquired Citgo Petroleum, a US-based oil refiner. Then relations got worse, and in the late 2000s and early 2010s, Venezuela expropriated gold and oil projects from foreign companies including Gold Reserve Ltd., Crystallex International Corp. and ConocoPhillips. [6]  The companies complained, and went to arbitration demanding that Venezuela give them back their gold mines and oil wells. They won in arbitration, and in the US court system, but the arbitrators and US courts couldn’t make Venezuela give them back their gold mines, and Venezuela didn’t.

It would vastly oversimplify things to say “and so the US court system expropriated Citgo from Venezuela and gave it to the gold and oil companies as compensation for having their stuff expropriated.” But that’s basically what happened, or rather, it’s what has been in the process of happening for the last decade or so. The gold mines and oil reserves are in Venezuela, so US courts can’t do much to give them back to the companies. But the Citgo refineries are in the US, and if US courts want to give them to the gold miners, Venezuela can’t do much to stop them.

The actual process is vastly more complicated, [7]  but essentially a US federal court in Delaware has been overseeing a quasi-bankruptcy-type process in which it is trying to maximize recovery for claimants — the gold companies, the oil companies, other companies whose assets were seized by Venezuela, and also holders of some defaulted PDVSA bonds — by selling Citgo to the highest bidder. (The case is often referred to as “Crystallex,” after the gold company that is the lead claimant.) In November, the court declared that the highest bidder was a company called Amber Energy Inc., which is backed by Elliott Investment Management L.P., the big activist-and-distressed hedge fund. The Amber bid would pay roughly $8 billion for Citgo ($5.9 billion to the companies whose assets were seized, and $2.1 billion to the PDVSA bondholders), and the court concluded that “the fair market value of the [Citgo] Shares does not exceed $10 billion,” [8] though of course the market for Citgo, in a world of lawsuits and sanctions and geopolitical tensions, is not super liquid.

Back in November, this was all a bit abstract. Broadly speaking, the US could extract Citgo from Venezuela and give it to Amber (because Citgo’s assets are in the US), but a district court in Delaware couldn’t do that on its own. Various parties appealed from the decision, but also, Venezuela was under US sanctions, and any actual transfer of the Citgo shares would require a sanctions waiver from the US Treasury Department. Elliott was playing a long game, and it’s not like it has been running Citgo’s refineries for the last month.

This weekend, though, the situation changed. The Wall Street Journal reports:

For activist hedge fund Elliott Investment Management, Nicolás Maduro’s swift exit comes at an auspicious time.

A U.S. judge in November backed a roughly $6 billion bid by Elliott for Citgo Petroleum, the refining firm owned by Venezuela’s state-run company Petróleos de Venezuela, known as PdVSA, in a forced sale to satisfy creditors. Citgo, based in Houston, owns a U.S. network of refineries, pipelines and terminals that some analysts have said could be worth between $11 billion and $13 billion. ...

Now, Elliott appears poised to reap the rewards of owning Venezuela’s most valuable foreign oil asset. The regime change could lead to an increase in Venezuelan oil production, which would likely provide cheap feedstock to Citgo’s Gulf Coast refineries and increase the company’s value, analysts and refining experts said. ...

Elliott isn’t in the clear yet. The hedge fund still needs approval from the Treasury Department to conclude the deal. Plus, PdVSA and Venezuela have appealed the judicial sale.

The appeal is likely to be decided in the first half of the year, and the sale can then close if the Treasury has approved it, according to people familiar with the situation. Elliott sees an alignment between the sale, which was held to satisfy some of Venezuela’s creditors, and the White House’s articulated goals of getting U.S. companies repaid for Venezuela’s previous asset seizures.

Elliott is still not running the refineries, but its ownership is a lot less hypothetical than it was a week ago.

There is another oddity here, though. Elliott is buying Citgo essentially from Venezuela’s judgment creditors, from companies whose gold mines and oil fields were expropriated by Venezuela 15 or 20 years ago. [9]  Regime change will make it easier for that deal to close, so that Elliott can get Citgo and the gold and oil companies can get paid. But it is also conceivable that regime change will reverse the expropriations. Bloomberg’s Jacob Lorinc reports that Gold Reserve is Venezuela-curious again:

Gold Reserve Ltd. has spent years fighting with Nicolas Maduro’s government over two gold deposits seized by Venezuela. Now, after the US captured the country’s leader on Saturday, the tiny mining company sees a path to regain those prized assets.

The company operated two gold and copper deposits — Brisas and Siembra Minera — before they were seized by Venezuela’s government in the 2000s and 2010s. The Brisas deposit, which was confiscated under the Hugo Chavez regime, holds about 10 million bullion ounces — worth about $44.4 billion based on Monday’s gold price.

Paul Rivett, the company’s vice-chair, says he fielded numerous calls from mining companies over the weekend expressing interest in the deposits. Already, Rivett said he’s exploring deals that could help develop them under a new Venezuelan government.

“We will be doing some form of a transaction, whether it involves an investment into us or a partnership,” he said in a Monday interview. “Thankfully we’ve been able to hold on to all the mining professionals and geologists who found this deposit and proved it out years ago, but they’re all in their late 60s and 70s. What we need now is operational expertise.” …

The company is one of two North American miners that filed arbitration suits against Venezuela after their assets were seized. The other firm, Rusoro Mining, said Monday that its chances of collecting more than $2 billion in compensation from the Venezuelan government have improved, following the US removal of Maduro.

What if they get all their gold mines back? Do they still need to seize Citgo for compensation?

A simple distinction between “banks” and “private credit” is:

1. Banks mostly make loans using short-term debt funding. (That is, they take deposits.) If a bank makes a $100 loan, it probably uses $10 of its own equity and $90 of money borrowed from depositors.
2. Private credit funds mostly make loans using long-term equity funding. (That is, they raise funds from investors.) If a private credit fund makes a $100 loan, it probably uses, say, $70 of its investors’ equity and $30 borrowed from banks.

There is something a little bit puzzling about this story. Banks like to complain about capital regulation: Post-2008 regulation has pushed banks to use more of their own equity to make loans, and to borrow less money. This has, arguably, created the conditions for private credit to thrive: It is harder for banks to compete to make loans, because of the more onerous capital requirements, and so private credit can take market share from them.

But private credit has much higher capital ratios than banks. Some private credit funds are unlevered (that is: 100% equity capital), others borrow perhaps half of their money (50% equity capital), but I doubt any private credit fund runs at the leverage levels that are normal, even now, for banks (something like 8% or so). If the competitive problem for banks is too much capital, how does private credit compete with even more capital?

The answer is some combination of “actually private credit can charge more for loans to earn its higher cost of capital” and “private credit is a simpler structure so it has a lower cost of equity than banks do,” though that is perhaps not fully satisfying. Still, at the margin, this does seem to be a real issue. And so if capital regulations were rolled back, and banks could make loans with less capital, they would be able to take market share back from private credit. Last week Bloomberg’s Hannah Levitt reported:

Bankers who’ve been grinding their teeth as alternative asset managers invaded their turf over the past decade are now brimming with optimism about the years ahead — saying the regulatory and market environment is swinging back their way. …

“It’s revenge of the banks,” said Mike Mayo, a Wells Fargo analyst who tracks the industry’s other major lenders. “For the last 15 years, banks have been competing against nonbanks, analogous to playing basketball with one hand behind their back. All of the sudden banks can now play against their competitors with two hands. That’s a euphoric feeling.” …

To the glee of bank leaders, the second Trump administration’s appointees at the Federal Reserve and other regulators are dialing back post-crisis restrictions, including proposed capital rules and stress tests that were long derided by the industry as misguided and costly — but which many outsiders argued were needed after taxpayer-funded bailouts in 2008.

Less disputed is that such tough oversight cleared the way for buy-side firms to make inroads into some of the most profitable types of lending. …

But in recent quarters, big banks have started flexing their lending muscles anew after beating back a slew of rules. They defeated an aggressive Biden-era proposal for stiffer capital requirements known as Basel III Endgame. They got reprieves on other oversight that pushed them to hold more capital, including Fed stress tests and a special cap on balance sheet leverage. ...

As regulation eased, the top banks boosted their loan portfolios at the fastest pace since the financial crisis.

One thing you sometimes hear is that private credit is risky because it is less regulated than banking, and I suppose a solution is to make banking less regulated too.

My general impression is that the typical path to running a multistrategy hedge fund goes something like this:

1. Grow up trading stocks (or convertible bonds), first in pretend stock-market games as a kid and later for real in your personal account.
2. Get a job as a stock trader and do well.
3. Launch a hedge fund to trade stocks, and continue to do well.
4. Hire some portfolio managers to trade some of your fund.
5. Hire more portfolio managers to trade increasingly diverse instruments.
6. Eventually you spend all your time on the meta-job of managing and allocating capital to portfolio managers, not trading stocks yourself.

That is, you start as an investor and end up as an allocator of capital to investors. There are good reasons for this path. For one thing, the investing job prepares you pretty well for the meta-job. Also, though, the investing job is pretty legible to a young person starting a career. You play the stock market game in high school, and you do well, and you think “ah, I have a knack for this.” You start trading stocks in college, and your stocks go up, and you think “hmm this could be a career,” and it all proceeds logically from there.

Whereas there is not really a direct way into the meta-job. For one thing, nobody is going to hire you right out of college to manage and allocate capital to portfolio managers. Also, you can’t really do that in college in your personal account. Also you do not play the pod shop game in your high school economics class.

But now you can! A reader sent me the Pod Shop Game:

OBJECTIVE: You have five years to build the world's greatest hedge fund.

Hire psychopaths. Leverage other people's money. Ignore the SEC. Become Too Big To Fail.

It looks complicated and I have not personally played it, but I hope that eventually Ken Griffin will hire people from the leaderboard.

First Brands Creditors Allege Kickbacks on Deals Returning 300%. Trump’s Hint to Oil Executives Weeks Before Maduro Ouster: ‘Get Ready.’ Saudi Arabia Opens Capital Market to All Foreign Investors. Michael Platt’s Client-Free Trading Decade Racks Up 7,858% Gain. Copper Surges to Fresh Record as Inventories ‘Locked in the US.’ Telegram hit by $500mn Russian bond freeze. Nvidia Unveils Faster AI Chips Sooner Than Expected. Jain’s Multistrategy Hedge Fund Gained 3.7% in First Full Year. Light Street Gains 37% in Big Year for Stock-Picking Hedge Funds. Defaults on art-backed loans soar in struggling market. “There’s something self-effacing about saying, ‘Let’s do that M&A meeting at Tommy’s.’ ”

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