Hedge Your Buying Bets With Housing Futures

By: Conrad Aenlle: REALTOR® Magazine Online
The Chicago Mercantile Exchange expects to begin offering a series of futures and options that let home owners bet on the rise and fall of home price indexes across the country.

The deal could work this way, according to Christopher J. Cordaro, a partner at RegentAtlantic Capital, a New Jersey investment firm. Sellers put their $1 million house on the market while they search for a new one that costs $1.5 million. They spot the perfect house, but they don’t buy because they fear the price of their old place is falling.

So the sellers sell futures contracts on the S&P/Case-Shiller home price index for New York. Each contract is worth $250 times the index level, which recently was around 210. To hedge against a $1 million home, the sellers would need to sell about 20 contracts.

If home prices decline in the region, the couple would receive $5,000 for every point that the index fell, an amount that should offset a drop in the value of their home. If prices rose, they would have to pay $5,000 for every point of increase in the index, but their house should be appreciating by a similar amount.

Similar deals could be available in Boston, Miami, San Diego, Washington, D.C., Chicago, Denver, Las Vegas, Nev., San Francisco, and Los Angeles.