Homeowners and investors feeling the pain from a dip in housing prices may find respite in a new corner of the financial market that allows them to bet on changes in future prices.
In late May, the Chicago Mercantile Exchange introduced Housing Market Futures and Options, an investment vehicle similar to futures contracts that allows investors to hedge against changing commodity prices. The exchange hopes investors will seek protection through these instruments at a time when many anticipate a further real estate slowdown. The system was co-developed by Yale economist Robert Shiller.
So far, volume has been relatively slow since trading began on May 22. There were 391 contracts traded in the first three weeks of operation ending June 8.
The city with the most contracts traded was Miami, with 117, followed by Los Angeles, with 112. Only 23 New York contracts were traded.
The contracts are tied to the S & P/Case-Shiller Home Price Index, a survey of housing prices in 10 metro areas in the U.S., which makes it hard to compare the volume traded to any benchmark.
Most other futures contracts are for physical commodities such as cattle, pork bellies or coffee beans, while the housing contracts are pegged to a more abstract index of housing prices.
While housing futures contracts numbered in the low hundreds, around 817,500 live cattle futures traded in May — the most actively traded commodity. Pork bellies futures contracts numbered around 10,300, while a few commodities were less heavily traded than the housing futures — fertilizer urea, for example, saw eight contracts traded that month.
According to Mary Haffenberg, a spokeswoman at the Chicago Mercantile Exchange, there is really “nothing like this.”
She said the trading so far has been a “very respectable showing for new product where there’s a learning curve.” Futures exchanges constantly introduce new products in hopes that investors will take to trading them.
Developers and other real estate professionals hedging their bets against dropping real estate prices, as well as investors, can benefit greatly from these contracts, according to Fritz Siebel of Tradition Financial Services Brokers, who is familiar with the contracts and helps clients trade them.
“We’ve received unsolicited calls from all kinds of developers from all over the country” regarding the futures and options, he said.
Some kinks still need to be worked out, Siebel acknowledged, including the time frame of the contracts.
Siebel said that many developers are interested in long-term contracts of about two to six years. Currently, the longest contract offered expires in a year.
“The developers in general have responded well despite infrastructure issues which should be solved by the end of the year,” he said.
Miami’s lead in the number of contracts traded likely has to do with the abundance of real estate speculators in that market. The contracts can offer those speculators who benefit from raising home prices a unique hedge against possible losses.
Brad Hunter of Metrostudy, a housing market research firm, said that “a lot of people are expecting a downward adjustment in Miami condo prices.” This, according to Hunter, could help explain the popularity of the Miami contracts.
Although the individual homeowner could stand to benefit by investing in these futures, they do not necessarily offer a direct hedge against the price of an individual’s home.
Since there are contracts for only 10 geographic regions, and home prices within those 10 regions can move differently, an individual could possibly see the value of his investment fall with the value of his house.
Siebel said that individuals can benefit from the investments, but “futures markets are professional markets” and an individual should “fully understand what they’re getting themselves into.”