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Housing futures to allay bubble fears

Housing bubble got you troubled? Now you can invest in housing futures as a hedge against the possibility that your local real estate bubble might burst and drive down the value of your home.

In May, the Chicago Mercantile Exchange, the nation's largest futures market, opened trading on housing futures and options that allow homeowners, mortgage lenders, builders and institutional investors to participate in the ups and downs of the current housing market.

The Merc's housing index, designed by Standard & Poor's and based on the work of economists Karl Case at Wellesley College and Robert Shiller at Yale University, covers 10 metropolitan markets (Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, D.C.), as well as a U.S. composite.

In turn, the Chicago Board Options Exchange has announced plans to introduce its own electronic housing futures contracts soon. It will be based on the National Association of Realtors' existing-home sales figures, broken out into four regions (Northeast, South, Midwest and West), 10 metro areas and a U.S. composite.

While Joe Homeowner can participate in these publicly traded futures, the cost of hedging might prove prohibitive unless he holds prime and pricey real estate. Each Merc housing futures contract is worth $50,000, with an initial buy-in (also called a good faith investment or margin) of $2,500 (5 percent of the contract's value), not including brokerage fees. Contract values have not been announced for the CBOE housing futures yet, but its offerings will carry a 10 percent to 15 percent initial buy-in.

"It isn't really intended for individuals," says Manhattan-based financial adviser Lew Altfest of L.J. Altfest & Co., though he has had a few clients inquire about the new offerings.

"No question, people are afraid that they're buying now at a high price and they're going to be stuck with something that is going to go down 20 percent," he says. "The machinations of hedging are not exactly the same as owning, but it can offset declines."

How futures work
Futures and options, known in the financial world as derivatives, help investors offset the risk exposure of their portfolios.

A futures contract is a legal agreement to buy or sell a product -- typically commodities such as pork bellies or oil -- for a given price at a given time in the future (hence its name). An option gives the buyer the right, but not the obligation, to buy or sell a security at a given price at or within a given time. Speculators buy futures and options to try to profit from market volatility; hedgers use them to offset the risks of adverse market movements on their investments.

Next: "Who would buy housing futures?"
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