Housing Price Futures

I heard about this on NPR radio the other day ... A great way of hedging a housing market. If you are buying now, and are afraid that the housing market might fall through the floor in your town, then you can short the housing future. If you think that your area might see an uptick in housing, then long the future.


(from a CBS Marketwatch article)

The Chicago Merc introduced cash-settled futures and options based on housing markets in Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, as well as a weighted composite index.

The contracts are priced by multiplying the index value by $250; the average contract size for the various cities is roughly $55,000, although they vary by region, according to Sayee Srinivasan, associate director of research and product development at the CME. He said the exchange is considering adding contracts for other booming real-estate markets such as Phoenix and Orlando.

"The futures markets like volatility, so the contracts based on the most volatile housing markets might see the most volume," Srinivasan said.

For each region, there are four contracts, which expire on a quarterly basis, so there are currently contracts for August 2006, November 2006, February 2007 and May 2007.

Although the contracts have only been trading for a very short period, most of the interest is looking further out on the curve with the May 2007 contracts getting the most action initially, said Fritz Siebel, senior broker at Traditional Financial Services Inc.

There could be demand for longer-dated contracts, something the CME is considering if the existing contracts prove popular enough.

Siebel noted the early interest has been in derivatives based on hot West Coast markets in San Diego, Los Angeles and Las Vegas, and also Miami on the East Coast.


©2006 Marc Adler - All Rights Reserved