As talk of bubble rises, Chicago Mercantile Exchange trades housing futures

Are you pretty certain the much feared housing bubble is ready to burst? Think the whole idea of a bubble is misguided? Well, now you can put your money where your mouth is. The Chicago Mercantile Exchange began trading housing futures yesterday, allowing players to manage risk and hedge against declining prices.

In its first day of housing futures trading, the Merc saw 52 contracts with a notional value of about $3 million traded, according to Reuters. You can see real-time quotes if you’re willing to give up info and log in to CME online. The Merc uses specially developed housing price indexes to track 10 metropolitan markets: Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, D.C.

In simple terms, the purchaser of a contract gains if prices rise, but the seller gains if prices fall. Mortgage lenders, mortgage insurers and builders have been mentioned as prime audiences.

But real estate maven Sam Zell was skeptical about the concept in this Bloomberg story at globeandmail.com, where he said it was easy to trade on a commodity like corn, where one bushel is much the same as the next, but difficult to trade an asset as diverse and difficult to measure as housing.

If you want to make your own assessment and you’re missing graduate school, you can wade through the CME’s White Paper on housing futures.

We’re not qualified to give odds on the future of housing futures at the Merc, but the idea seems to have merit. The same sort of concept was behind the home equity insurance plans instituted in Oak Park in the ’70s and more than a decade later in racially changing Chicago neighborhoods to prevent white flight. Once homeowners were able to hedge against the perceived risk of property values falling in racially changing neighborhoods, they could act rationally and stay put. Sometimes a little bit of comfort can bring a lot of stability, and these days that should be no small perk for U.S. housing markets, bubble or no.

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