Housing futures market opens doors tomorrow

May 21, 2006|By RANDI F. MARSHALL | RANDI F. MARSHALL,NEWSDAY

You can protect yourself against stock market losses, you can get a warranty on many big-ticket items, and you can insure yourself against all sorts of unforeseen events.

But you can't do anything to protect yourself if the value falls on one of your largest assets: your home.

Housing experts, teamed with the Chicago Mercantile Exchange, are hoping to change that. Beginning tomorrow, the exchange will open trading on housing futures and options, allowing homeowners, builders, mortgage financiers and others to hedge against the ups and downs of the housing market by betting on its future.

While no one is sure whether the concept will succeed, experts note that managing home-price risk is critical at a time when the housing market is more precarious than it has been in nearly a decade.

"The real estate market has been very volatile, and we're in a very uncertain time," said author and housing expert Robert Shiller, who has been developing the housing futures concept for more than 15 years and helped to create the index upon which the Chicago Mercantile Exchange's trading will be based. "We don't have any consensus on where it's going, but once we have a futures market, there will be a set price for future real estate."

That could lead to even more developments in the real estate world, Shiller said. Imagine being able to take out a home-equity insurance policy as an addendum to your homeowner's insurance, protecting you against dips in your home's value.

Risky arena

To be sure, this likely isn't a market for the mainstream homeowner who has no experience in futures trading. The market is expected to be more risky than other investments and could require significant leverage since an investor initially puts in only a small percentage of the money he might need to cover losses.

"You can have huge gains and huge losses," said Michael Gorham, director of the Illinois Institute of Technology's Center for Financial Markets, who once worked on the Chicago Mercantile Exchange. "With a relatively small dollar position, you can get wiped out pretty quickly."

Look into the future

A futures contract is a legal agreement to buy or sell a product, traditionally a commodity like oil or corn, at a given time for a given price.

Investors seek to profit from price movements and volatility in a product, while those who use, sell or buy a commodity use futures to hedge against their risks. Investors also could choose to work in options, which represent the right to trade but not an obligation, and therefore have less potential for losses.

A builder, for instance, could use a housing-futures contract to protect himself from price changes between the time he buys land, builds a house and sells it. Mortgage lenders, insurers, bankers and others in related industries could do the same thing. Individuals who have high net worth and own significant real estate might want to mitigate their risk, too. Meanwhile, those who want to invest in real estate could buy futures contracts instead of actual property.

The Chicago Mercantile Exchange will be using the S&P/Case-Shiller Home Price Indexes for 10 metropolitan areas, including New York, as well as a composite that will represent the nation. Each contract will be worth $50,000, and the initial "good faith" investment - known as a margin - will be roughly $2,500, not including brokerage fees, according to Sayee Srinivasan, the exchange's associate director of research and product development. Futures contracts move in increments of $50 as the index moves up or down.

Nonetheless, some investors might consider this a cheaper way to include real estate in their portfolios.

"It's been pretty expensive to actually invest in this market until now, because you'd have to go out and buy a lot of property," Srinivasan said. "With a futures contract, now you can actually do it at a more reasonable price."

At HedgeStreet

Housing futures are already traded on HedgeStreet, a small online exchange in San Mateo, Calif. HedgeStreet gives mainstream investors a chance to buy far less expensive futures contracts, worth only as much as $10 each.

"Many people don't have enough capital to buy a house but still want to participate in real estate," said Russell Andersson, HedgeStreet's vice president of instrument origination. "Here is an inexpensive and interesting way to invest."

HedgeStreet, which recently partnered with the Chicago Board Options Exchange, uses a housing price index from the National Association of Realtors. The options exchange is planning to launch its own housing futures trading by the end of June, also using the Realtors data.

"I would think you want something that's very public and has been under the public's eye for many years," Realtors association chief economist David Lereah said of the use of the Realtors' index.

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