A new way to hedge against falling housing values

Posted by: Dean Foust on August 30, 2006

This development has gotten very little ink (in fact the only publicly accessible story I could turn up on it was this one from last June) but the Chicago Mercantile Exchange quietly began trading futures contracts on home resale values last May. The contracts are based on the Standard & Poor’s Case-Shiller Metro Area House Price indexes, which track price changes of existing homes in 10 major metro markets. I’m no financial planner, but sounds like it would be perfect for an individual who, thanks to the bubble, has too much of their wealth tied up in housing, or an individual who bought it at the peak of the market and is now terrified that a downturn could leave them upside down.

Not sure that futures are for the small investor, but you could imagine that this could lead the financial wizards of Wall Street to start creating Exchange Traded Funds based on the Case-Shiller index. Of course that could take a couple more years and might end up being too late for homeowners who ride the market back down again.

Are any readers of this blog more literate in futures than I am? If so, I’d invite you to spend some time on the CME web site and share what the current trading prices of these options tell us about the prevailing mood on housing prices.

Reader Comments

David Shvartsman

September 2, 2006 12:38 AM

Hi Dean,

The Marketwatch article gave a good overview of these instruments. I also mentioned them briefly in an article last May entitled, "This Week's Financial Innovations".

It's funny, but when I went through and read the article link you provided, I started thinking "this is the kind of thing that would probably take off at a venue like Hedge Street".

Sure enough, down the page, was the mention of the Hedge Street housing futures market.

I didn't recall hearing about it before, though it made sense. A futures market for housing seems a concept that would really catch on with retail investors at the tail end of a boom (when everyone is thinking about it).

In the intervening periods, you might have some interest from institutional investors looking to hedge any property market risk they might have, but their needs might be covered for now with individually tailored property derivatives.

This is not to suggest a futures market for property isn't feasible (I don't think that I have the knowledge to make that judgement anyway); but I do think that you would have to see liquidity pick up significantly in order to attract speculators.

Thanks,
David

David

September 6, 2006 4:06 PM

How do you take delivery on this futures contract if it expires while you are holding it? These securities are illiquid, and therefore high risk. Also, who is the counterparty, and what guarantee is there to ensure they can make good on the hedge?

Charan

September 13, 2006 2:50 PM

Check out www.macromarkets.com for research material on the S&P/Case-Schiller index, and www.cme.com/trading/prd/overview_HNG18558.html for the actual product. Barron's also had some material on this last weekend.

The security in question is index futures as opposed to physical commodity futures.

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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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