|Housing futures to allay bubble fears
What attracts both camps? Day-to-day market volatility -- something that skeptics claim U.S. housing markets just don't have, localized bubbles notwithstanding.
"What's the information that's going to come between
today and tomorrow, or tomorrow and the next day, that is going
to lead you to change what you think houses are worth in Chicago
or San Diego? Probably not much," Pirrong says.
"There's also a chicken-and-the-egg side to this in that nobody wants to trade until a bunch of other people trade. Who's going to be the first one into this market? It takes time to build that critical mass of people, and given the nature of this product, that may be a very daunting challenge."
Home equity insurance
Then again, Case-Shiller Home Price Index co-developer Robert Shiller
says that regardless of how investors initially respond to housing
futures, just establishing the exchange is an important step toward
the ultimate goal: home equity insurance. Shiller, whose book "Irrational
Exuberance" predicted the 2000 stock market tumble, has spent years
advocating home equity insurance, pointing out that homeowners currently
bear the entire risk, should their houses decline in value.
"The risk-management institutions have to keep up
to date on what risks are important," he says. "A hundred years
ago, fire was a very important risk because they didn't have building
codes at all and they were lighting their homes with candles and
oil lamps which are fire hazards. The hazard today is price risk."
He hopes the housing futures market will also give
large insurers a way to hedge the risk of offering home equity insurance.
"Once we have a futures market, then people can develop
home equity insurance and mortgage products that protect the equity
in the home and they in turn can then use the futures market to
hedge the risk they assume by creating these products."
While it may be years before the verdict is in on
the worth of housing futures, Altfest says there's enough uncertainty
about the real estate bubble to make it an attractive option for
"Real estate itself may not go down materially -- the Federal Reserve certainly doesn't want it to go down -- but there is no question that you're not going to make a lot of money in real estate from now and going forward. And it's likely to decline -- if not absolutely, then in real terms."
Jay MacDonald is a contributing editor based in Mississippi.