[REAL ESTATE] Ralph Liu - Real Estate Entrepreneur
- Entrepreneur Sees a Futures Market for Homeowners
Ralph Liu is trying to start an exchange for hedging real estate.
Some say the challenge would be finding enough buyers, sellers.
By Josh Friedman, Times Staff Writer
Ralph Liu's first experience in real estate investing was every
After getting his Wharton School MBA and heading to work on Wall
Street in 1987, he bought a condominium on New York's Upper East
Side for $220,000 -- and then sold it seven years later for $160,000.
"I made other people happy by selling at the bottom," the 44-year-
old Taiwan native said with a chuckle.
Now, Liu hopes his new venture, Advanced E-Financial Technologies
Inc.'s Real Estate Futures Index Exchange, will help other
homeowners avoid a similar fate.
The Corona-based entrepreneur is trying to raise $5 million in
capital to launch what he calls the world's first residential real
estate futures market, an online exchange that would allow
homeowners to hedge their investment and others to speculate on
price swings in ZIP Code-based housing indexes.
He hopes to begin a pilot program by the end of the year that would
involve the trading of futures contracts tied to indexes of property
values in three to five ZIP Codes. He wants to use Corona, Pasadena
and Santa Monica as the testing grounds.
The idea has plenty of doubters. But with the residential housing
market in the U.S. worth an estimated $13.6 trillion -- and home
prices continuing to soar in many areas -- Liu believes the
concept's time has come.
"Almost everybody has exposure to the housing market, but how can
you hedge?" said Liu, who left Wall Street in the early 1990s to
work in Asia for Union Bank of Switzerland and Chase Manhattan
before founding a consulting and financial software firm, Advanced
Risk Management Solutions Ltd., which he later sold.
How Futures Work
Futures contracts are agreements to buy or sell a specific amount of
a commodity or other asset at a set price on a specific date. They
have been available in the United States for almost 200 years and
for seemingly any asset other than real estate. A farmer can use
them to hedge against a drop in soybean prices, or a catalog jeweler
to guard against a spike in gold.
Here's how Liu envisions bringing the same concept to real estate:
The owner of a 3,000-square-foot house with a mortgage of $300,000
and a current value of $405,000 wants to hedge her position. Say a
housing index of her ZIP Code has a median value of $135 per square
foot -- matching her home's value. She could sell 30 futures
contracts (which would be sold in increments of 100 square feet) at
If, over time, the ZIP Code index falls to $120 per square foot, the
homeowner would be up $15 per square foot, or $1,500 per contract,
for a total of $45,000 -- offsetting the drop in her home's value
(assuming it moves in sync with the index).
If the ZIP Code index in the example above were to rise to $150 per
square foot, the homeowner's futures contracts would be in the red
by $45,000, but that loss would be offset by the rise in the home's
Either way, the only cost to the homeowner would be commissions,
which Liu estimates for the example above at $375 upfront and $25
per quarter (as contracts are updated). In other words, it would be
like buying a form of insurance.
As Liu plans it, homes would provide the collateral for these
contracts, but there wouldn't be forced property sales to settle the
futures. Contracts would be "marked to market" daily, which for
speculators would entail putting up more money to cover paper losses.
(Liu provides more information on the mechanics at a Web site,
Liu, who returned to the U.S. in September 2001, has met with a
handful of California venture capital firms and wealthy individuals
who back start-ups, and none has committed.
Fund-raising is only one challenge.
The firm would need to obtain a license from the Commodity Futures
Trading Commission, which regulates futures markets.
Ultimately, the biggest hurdle if the exchange gets up and running
could be to build a big enough base of futures buyers and sellers.
"It sounds innovative and interesting," said Cynthia Cain, director
of planning and development at the National Futures Assn. in
Chicago, a trade group and self-regulatory organization for the
futures market. "But the challenge any new market faces is
attracting enough liquidity."
Tom Skinner, the founder of Washington-based start-up Real
Liquidity, whose government-backed pilot program has offered home
equity protection contracts in Syracuse, N.Y., since September, is
"I'm not too keen on the notion of using a ZIP Code-level index
because you're not going to get liquidity," Skinner said. "In the
L.A. area, for example, there are so many ZIP Codes. There are not
going to be enough buyers and sellers for each one."
The indexes, compiled by data trackers such as DataQuick Information
Systems, can fluctuate dramatically from quarter to quarter, Skinner
said, especially when few homes are sold.
Real Liquidity, whose contracts cost 1.5% of a home's value, has
sold about 50 policies so far, he said.
A homeowner is allowed to make a claim if he lives in his home for
at least three years and his ZIP Code index falls. If he buys
$100,000 of protection at a cost of $1,500 and the ZIP Code index
drops 10%, he could make a $10,000 claim when he sells.
Liu believes middlemen such as banks would use his futures contracts
to offer an insurance-type product in the Real Liquidity vein.
Although it's unclear whether there is any future for real estate
futures, Liu's former colleagues say he has the knowledge and
trading savvy to pull it off.
"I respect him not only as a trader but as a strategist with a
market view," said James Pan, who co-manages a fixed-income hedge
fund at Seagate Global Advisors in Redondo Beach.
When Pan and Liu worked in Asia during the 1990s -- Pan for the
agency that runs the Chinese central bank's foreign exchange
reserve -- Liu helped coach him about trading techniques.
Liu said there were several reasons earlier efforts to establish
real estate futures never got off the ground, but he said that with
today's widespread Internet use, thriving housing market and the
wider dissemination of ZIP Code indexes such as those maintained by
DataQuick, the time is right.