The U.S. housing market has an estimated $20 trillion in assets. The combined value of all the companies traded on the New York Stock Exchange was $13.9 trillion as of January 2006. Last month's launch of a housing futures market, therefore, is probably long overdue. “Housing is the largest asset class that is currently unhedgable,” says Karl Case, an economics professor at Wellesley College.

Standard & Poor's Chicago Mercantile Exchange Housing Futures and Options trading was expected to commence in April, according to news reports. Investors would be able to speculate on housing prices in 10 cities, as well as a “national” composite of those 10 markets.

The futures will be based on the Case Shiller Home Price Indexes, first developed by Case and Robert Shiller two decades ago. The pair are co-founders of both Fiserv Case Shiller Weiss and MacroMarkets, the two firms that developed the price indexes for the Housing Futures and Options market.

Hedge Your Bets It's unclear who the main customers of the derivatives will be. “Historically, most individual investors don't invest in futures,” says Shiller, an economics professor at Yale University, confirming that the most active traders in this market will be institutional. “[Futures markets] aren't set up to be user-friendly.”

“However,” he continues, “they can be a very good investment.” One subset of contractors who may want to consider investing in a housing futures market, according to Shiller, would be remodelers and builders who work on spec. “Buying a property and fixing it up entails some risk,” he says. However, remodelers could now hedge that risk by “shorting” the housing market.

Whether you choose to invest in this new market or not, it's likely that you will be affected by it. How is another question entirely. According to Shiller, it is the first market of this type for the housing industry in this country. A similar market was attempted in the U.K. during the early 1990s, but it failed. As a result, Case says, “it's hard to say how [the U.S. market] will turn out.”

If the futures trading is a success, Shiller says the result will be a more efficient housing market. “Home prices have been going up for years,” he says. “That's not the way most liquid financial markets behave. Once professional investors can get into the single-family housing market, it will change the way prices behave. They won't be so easy to forecast.”

Case suggests that the security provided by the ability to hedge housing risk — in essence, buying home equity insurance —could lubricate the market. “Buyers are getting spooked by the talk of the housing bubble bursting,” he says. “If people had a way of protecting themselves, it could put more people into homeownership.”

Investors Will Be Able to Speculate on the Prices of Homes in These 10 Cities San Diego, Los Angeles, San Francisco, Las Vegas, Denver, Chicago, Miami, Boston, New York, and Washington, D.C.

Figure This

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