New way to bet on real estate
New financial instruments are being launched to let you wager on the direction of home prices in major cities.
NEW YORK (CNNMoney.com) - There's finally going to be a viable way to cash in on the housing price boom -- or to guard against its decline -- without going through the messy business of actually buying and selling properties.
On Tuesday, the Chicago Mercantile Exchange and Tradition Financial Services, together with Fiserv Case Shiller Weiss and Standard & Poor's, announced the launch of S&P CME Housing Futures and Options.
These derivatives will enable investors to take a position on the direction of home prices either for the nation as a whole or for 10 major cities to start, including New York, Los Angeles and Chicago.
Of the three major asset classes, the bond, the stock and the housing markets, only the housing market, which represents some $20 trillion in assets, cannot be speculated on easily, said Robert Shiller, the Yale economist and author of "Irrational Exuberance," the 2000 book that foresaw the bursting of the tech-stock bubble.
"How can it be that we have no way of trading it?" said Shiller.
With his partner, Karl Case, Shiller started developing the Case Shiller Home Price Indexes about 20 years ago. The pair claim it is now considered the most accurate measure of the residential real estate markets. The S&P CME Housing Futures and Options will be based on the data accumulated in these indexes, so accuracy is crucial for building trust among potential investors.
Who will use them?
Shiller sees these derivatives mostly as tools that large, institutional investors can use to reduce risks. Mortgage bankers, for example, could hedge against falling real estate markets that would increase their exposure to delinquencies and foreclosures.
But John Labuszewski, of the CME, says, "Although the main customers will be institutional, there is a surprising amount of interest on the part of retail consumers."
So how would an ordinary consumer employ these tools?
Shiller says there are several ways including:
Such hedging strategies should get easier, according to David Stiff, economist at Fiserv Case Shiller Weiss. He thinks home owners will eventually be able to buy home equity insurance that will protect against loss from falling home prices. Homeowners already have fire or storm insurance to protect them against losses, why not protection against losses from home price decreases?
It's perhaps ironic that one of the moving forces behind this product launch is Shiller, who has warned that housing markets are probably peaking and primed to fall. Might not these derivatives make the housing markets volatile?
"Real estate already is volatile and risky – like the stock market," says Shiller. "And the risk is increasing. The impression that real estate market only goes up is wrong. We need hedging for both sides."
TFS says it will start trading S&P CME Housing Futures and Options in April.