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OK, Smart Guy ...

Posted by: Peter Coy on March 23, 2006

Put your money where your mouth is.

Robert Shiller.jpg

Starting in April, you’ll be able to hedge or speculate on housing prices in ten major U.S. cities. The Chicago Mercantile Exchange will offer futures and options based on price indexes for the markets. Standard & Poor’s, a sister company of BusinessWeek, is branding the price indexes, which were developed by MacroMarkets LLC and Fiserv Inc. Check here for more information. The ten cities are Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York (a “commuter index”), San Diego, San Francisco, and Washington, D.C. There will also be a composite of the ten cities.

If you live in a high-priced market that you're afraid will fall, but for personal reasons you don't want to sell and move, you could buy, say, a put option on the index for that city. That way, if prices fell, profits on your put would offset the lower value of your house. Or you could buy a call option on a market that you thought had room to rise.

People have been trying for years to trade housing-linked securities for obvious reasons--the total value of housing is over $20 trillion, making it bigger than the stock market. Previous efforts have failed, but this one has solid backing and appears to be well-thought-out. The price indexes were developed by economists Karl Case of Wellesley College and the gentleman pictured above, Robert Shiller of Yale University (author of "Irrational Exuberance").

Reader Comments

David Porter

March 23, 2006 1:01 PM

Hmm..that is interesting! I just love America. There is always some interprising guy/gal coming up with interesting and unique products.

I would love to see more information on this. I would think it would be difficult to do this on the country as a whole. But certainly there are pockets that I would put some money down on.

Does anyone think that California is going to continue up? Would you be willing to bet that it is going down? Maybe!!

Awaiting Bubble Rubble

March 27, 2006 2:19 AM

I don't understand how this will work because Realtors(tm) (aka future Jamba Juice counter help) fudge the sales price numbers is several ways. In real terms, median sale prices have fallen in my area but the NAR reports show them rising because they look at the recorded sales price but don't account for the "seller pays closing costs," "seller pays credit for a new ----," "seller buys you a new car if you JUST GET OFF THE FENCE AND buy the house TODAY!!!" and all the incentives that didn't exist six months ago when buyers were eager. As the sellers become more and more desperate in the coming months, there will be all kinds of creative new incentives added and the Realtor(tm)'s incentive is to keep the recorded "sales price" as high as possible because it's the basis for their commissions. Increasingly desperate Realtors(tm) will also simply be putting fake numbers in their reporting database more and more often, hoping to keep their place on "the team" for another few months and knowing the actual sales prices via Dataquick or other agencies won't appear for a month or more.

So when a $900K house sells because the seller provided $300K in kick-backs, will the realtors report that the median price rose from $880K a year ago to $900K?

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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