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Real World Calculus: Real Estate Derivatives

Updated on April 17, 2013

Do you remember Calculus? One word might jog your memory just a little, seeing as how it was the basic foundation for all of calculus. That word is derivative. Many groan upon hearing that word and many question its legitimacy in the real world. Of course, many have no clue about the real estate market's new derivative market and its applications toward the real world either.

The practice of using derivatives in the market actually has existed for a number of years. Television shows feature the keen investor mumbling something about stock options and futures. You may have no idea of what derivatives are, but you know they sound pretty cool. Essentially, derivatives are assets derived from the market. The basic idea of derivatives is that investors can bet on how they think the market will behave. If someone thinks, the market will go up, he or she will purchase a derivative on the market from someone who thinks the market will go down.

The Derivatives Market in Real Estate

So what does this have to do with real estate? The derivatives market in real estate is actually comparatively new. Instead of purchasing actual property, which costs a lot of money even with how low the market is, investors purchase derivatives to try to get money off how they think prices on actual property will behave.

Unless you are in the world of investment and love playing the market, derivatives in real estate go much the same way as derivatives in calculus, becoming unnecessary information. However, the effect of derivatives is that they impact the real world market if they take over. If people who purchase the actual property begin watching derivatives and take heed of the predictions that others make, they may sell more irrationally than usual. If the derivatives market on real estate takes a dive, then those involved with the actual property may believe that their property value will also depreciate. They sell the property, causing the real estate market to take a dive as well.

Safeguard Against a Sudden Dive in Property Value

So how do you safeguard against a sudden dive in property value caused by a poor derivatives market. You have already completed the first step in that you are knowledgeable to the concept of derivatives and their applications. Instead of blindly listening to what the doomsayers on the financial channel say, you can think critically about the actual applications of the market. If they start talking about how the real estate derivative market is plummeting, then you need not freak out over the possibility of housing prices going low. Sure, there might be some worrisome indicators, but for the most part the real estate market is pretty stable. The second step is to have conversations with people about the real estate market. Sure, it sounds hoity-toity, sitting around conversing about derivatives and market prices, but it may actually be fun and it means less people will worry about the derivatives market and less people will take drastic measures because of what the financial gurus say.

Calculus may have lost its real world application in your life, but derivatives from the real estate market definitely should not. Without knowledge about them, you too could become victim to the doomsday predictions.

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