Housing Futures

[jeffrey]

If you're worried about the the value of you house falling significantly in the future, The Chicago Mercantile Exchange will let you bet on it beginning in April 2006. Even if you aren't interested in betting on your house (the futures aren't being tailored for individuals), there probably are institutions such as mortgage companies, home builders and investors with a large stake in residential real estate that will. It will also give other investors a new way into the residential housing market without actually purchasing property.

The housing price futures will be based on the median home price in ten different cities across the US: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco or Washington D.C. - or a composite index which includes each of the ten cities. Investors can trade contracts electronically based on median home prices in each of the cities.




The way the housing futures will work is pretty basic. Anyone who believes that housing prices will continue their dramatic rise can purchase contracts. If the actual worth of the median housing price in the particular city (or composite) is more than the contract when it expires, they make a profit.

Those investors who believe that residential real estate prices will decline can purchase a version of the contract called a "put option" which will pay them money if the housing median price decreases. The put option is similar to shorting a stock.

If a homeowner in San Francisco purchases a $1 million dollar home but feels that the housing market in the area is at a peak and will soon decline, he could purchase several thousand dollars of put options which are based on the median housing prices in San Francisco. If housing prices fall as he assumed, then he can sell the put option contracts for a gain thus lessening the blow of the decrease in his home value. If on the other hand he is incorrect and housing prices continue to increase, he loses the several thousand dollars he invested plus the commissions, but also likely has increased equity in his home.