Merc to offer housing-price futures next year
Associated Press
Published November 10, 2005
The Chicago Mercantile Exchange has committed to offer trading next year in a category many consumers take personally: home prices.
Housing-price futures, based on the median home price in 10 U.S. cities, aren't being tailored specifically for homeowners. But they may provide some protection for mortgage companies, home builders and anyone else with a large stake in residential real estate.
The novel investment product is set to make its debut in April, based on a final go-ahead given by the Merc earlier this fall after months of exploratory work.
"There really is no way now for anyone to hedge home prices," said Sam Masucci, chief executive of Macro Securities Research, the Morristown, N.J.-based financial research firm that's developing the contracts with the exchange. "Or for institutional investors to gain exposure to the market without going out and buying homes.
"Housing is one of the largest asset classes in the world, and we thought it made a lot of sense to give people access to it."
The concept of real-estate futures has been discussed since the early 1990s, but it took a boom in housing prices to propel it to reality.
Home values appreciated 65 percent nationwide from 2000 to 20004 and more than doubled in some areas, according to the National Association of Realtors. U.S. residential real estate was valued at $18.6 trillion at the end of last year.
"One never knows when you launch something like this, whether it's going to be successful or bomb," Masucci said. "But all the elements are there for it to be successful."
Investors will be able to trade contracts electronically based on median home prices in Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco or Washington--or a composite index of the 10 cities.
Anthony Sanders, a professor of real estate finance at Ohio State University, said the housing futures move is long overdue. "There's a huge demand out there on behalf of financial institutions to hedge their housing exposure, so this should be able to take off," he said.
Robert Hartwig, chief economist at the Insurance Information Institute, a trade group, was more skeptical. "While I think that theoretically it's a good idea, I'm not sure how much the market is going to materialize," Hartwig said.
Felix Carabello, the Merc's associate director for alternative investments, said the exchange continues to receive e-mail inquiries from home builders, hedge funds, pension funds, construction suppliers and mortgage insurers that demonstrate their interest.
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