|Housing futures to allay bubble fears
|By Jay MacDonald
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
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.
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.