Posted by Jonathan J. Miller -Tuesday, April 24, 2007, 10:06 AM
Radar Logic Incorporated, through its partner Ventana Systems, Inc. a mathematics consulting and software firm, have leveraged methodologies commonly used in the sciences, and applied it to real estate. The objective was to make sense of the national residential housing market by creating a daily housing “spot” price to be used in the trading of real estate derivatives.
The Radar Logic Daily Index is a single, statistically accurate value representing the price per square foot paid in a defined metropolitan area on any given day. Data is gathered from public source records and then translated by our proprietary algorithms into an accurate reflection of the values paid in actual arms-length real estate transactions.
First, a little history…
The name Radar Logic references modern radar, and its ability to illuminate order out of chaos.
When I met with the CEO Michael Feder not too long ago and began to grasp what he and his team had accomplished, a light bulb went on in my head (despite the usual foggy conditions) and I wanted to be a part of this effort immediately. (more on that below) The Radar Logic approach solved the glaring problems found in national market statistics, such as moving averages and omission of data types. Up until now, this has prevented the financial markets from efficiently using residential real estate as a basis of trading instruments such as derivatives in a manner similar to the futures and options contracts available in more traditional commodities.
A derivative is a financial instrument used to trade or manage the asset upon which the instrument is based. It “derives” its value from something else (another asset or instrument). Derivatives are most often used to manage risk or to take positions on future market directions. Derivatives exist for a wide range of assets, such as commodities (gold, oil, corn), stocks and bonds, and on indices, such as the Dow Jones IndexÂ®. Until now, there have been few derivatives markets for residential real estate. Radar Logic Incorporated was founded for the purpose of enabling financial derivatives based on real estate.
The residential housing market is the largest asset class in the United States. To provide some perspective, the Federal Reserve indicates that the US housing market represents about $21 trillion in value. Commercial real estate, while a large asset class, is only about 20% of that amount. Yet because the residential real estate market is made up of 124 million units worth an average of around $240,000, it is fragmented and difficult to measure.
In addition, residential real estate as an asset class, is constantly changing. It is characterized by seasonality, new development, the surge of condos in metro areas and now, the rise in foreclosures. Its always changing. The Radar Logic methodology considers all verifiable transactions in a market to arrive at a value for the day that is not a moving average.
Its really exciting, and its groundbreaking stuff, to say the least. The beauty of this approach, is that there are no hidden filters, assumptions or calculations. In other words, the market is the market.
In addition to my duties at Miller Samuel and Miller Cicero, I have become Chairman of Radar Logic Research, LLC as well as Director of Research for Radar Logic Incorporated. I am still going to be active in the operation of Miller Samuel and produce the New York area market report series for Prudential Douglas Elliman that I created and have authored since 1994, with more markets to be added. Trust me, I have simply invented more time in a day. (More on that at another time, when there is more time in the day.)
Radar Logic Research will develop and publish research products providing market commentary and analysis related to real estate values across the United States later this year for institutions as well as enterprise-specific consulting services to real estate and financial organizations, including builders, developers, brokerages, commercial lenders, REITs, and investors such as pension funds, hedge funds and insurance companies. The initial plan is to offer these services to cover 25 major metro areas, roughly 2/3 of the value of the US housing market.
More on this to come!
Ok, back to work.