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Housing futures to allay bubble fears
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Derivatives in general, and housing futures in particular, are far too complex, not to mention risky, for the garden-variety investor, says Craig Pirrong, professor of finance at the University of Houston's Bauer College of Business.

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"As an average homeowner, it's probably not something for you," he says. "You could use them, but it's unlikely that you would want to because it would be difficult for you as an individual to manage what you need. There is also a high likelihood that for an individual house there would be a pretty strong tracking error between the futures price and the price that you're actually going to get for your house."

So who would buy housing futures? Pirrong says there are two likely candidates.

"If you're a REIT (real estate investment trust) and decide you want to change your risk exposure without incurring the transaction costs of buying and selling properties in a particular market, this would be a way to do that," he says. "Alternatively, if you're an institutional investor who wants some exposure to real estate prices but doesn't want to do so by investing in real estate directly, this would be a way to do that."

Smaller-scale investing in housing futures has been offered since May 2005 at HedgeStreet.com, a San Mateo, Calif.-based online exchange that offers futures contracts at up to $10 apiece.

Pirrong says the reason nine out of 10 new, futures contracts bite the dust is they fail to attract equal numbers of buyers and sellers. "You need hedgers who are looking to lay off risk and somebody to lay it off to, which would be those looking at it from a speculative or investment perspective."

 
 
Next: "The hazard today is price risk"
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