Place Your Bets: Housing Futures Launched
A: Like most other markets, the housing market now has futures contracts to be traded via a partnership between The Chicago Mercantile Exchange and Tradition Financial Services. This is right up my alley as a former NASDAQ Equities trader for Tradescape (which is now E-Trade Professional) as it offers investors a way to safeguard themselves against a housing market crash (known as a 'hedge') or bet on which way you believe the housing market will go.
The Skinny: Now you can participate and cash in on a housing market boom or housing market crash without the hassles, transaction costs, and time that is involved with buying and selling real estate.
On Tuesday, the Chicago Mercantile Exchange and Tradition Financial Services, together with Fiserv Case Shiller Weiss and Standard & Poor's, announced the launch of S&P CME Housing Futures and Options.
According to the CNN Money article:
These derivatives will enable investors to take a position on the direction of home prices either for the nation as a whole or for 10 major cities to start, including New York, Los Angeles and Chicago. Of the three major asset classes, the bond, the stock and the housing markets, only the housing market, which represents some $20 trillion in assets, cannot be speculated on easily, said Robert Shiller, the Yale economist and author of "Irrational Exuberance," the 2000 book that foresaw the bursting of the tech-stock bubble. Shiller sees these derivatives mostly as tools that large, institutional investors can use to reduce risks. Mortgage bankers, for example, could hedge against falling real estate markets that would increase their exposure to delinquencies and foreclosures.
But John Labuszewski, of the CME, says, "Although the main customers will be institutional, there is a surprising amount of interest on the part of retail consumers."
It looks like there will be a few ways to trade housing futures which include:
1. By Direct Investment: Investors could buy futures in housing prices and profit if home prices continue to increase (if the investor goes long) or if they fall (if the investor goes short).
2. By Locking in Home Equity: Home owners intending to sell within a year or two can go short in home price futures. If the price of their house drops, that can recapture the loss on the investment.
Talk of Home Equity insurance is also mentioned in the article. Home Equity Insurance would be like any other type of insurance that you can buy which would protect your investment against losses should the housing market fall forcing you to sell at a loss.
It's interesting the timing of the launch of these futures as it comes at a time when many financial and real estate experts are predicting a slow down after 4-5 years of unsustainable growth.
UrbanDigs Says: Don't start messing with these contracts until you fully understand how they work and could affect your long term goals. If you are planning to live in your house for 15+ years there really isn't much need to start trading housing futures to protect against a possible near term collapse. However, if you are a speculator whose primary business is buying and flipping, this could be a perfect hedge against your business model should the housing market take a tumble. By selling short (bearish on housing) on the housing futures you will actually profit if the market falls allowing you to recoup losses from the eventual sale of property. If there are options contracts available, it's always better to write a call (bearish) or sell a put (bullish) so that you do NOT have the time value component working against you. For those interested, here is a Quick Options Tutorial.
~ New Way To Bet on Real Estate
