mark nottingham

Housing Derivatives

Sunday, 23 April 2006

The Economist gives a heads-up [subscription required] about the Chicago Mercantile Exchange’s plans for housing derivatives;

In the next few weeks, the CME is likely to open trading in financial futures and options linked to American house prices. Investors who want to hedge the risks of residential property—or merely to speculate on the market’s direction—will be able to bet on a rise or drop in a house-price index, without having to buy or sell bricks and mortar.

They’re starting with ten US cities, including San Francisco, and they’re based on the excellent work of Case and Shiller. As the Economist points out, the contracts are only good for a year, so it’ll be of limited value to homeowners; still, a one-year grace period may be invaluable in hot markets like the Bay area.

What’s really interesting about them, however, is the transparency that they’ll bring to the housing market; it’ll be far from perfect, but for the first time, housing professionals will be able to bet on the future of housing prices. It’ll be really interesting to see where they head.