A New Way To Hedge Against Housing Declines

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A New Way To Hedge
Against Housing Declines

By Alistair Barr
From Marketwatch

Talk about well timed.

As concerns grow over a slowdown in the recently booming U.S. housing market, new financial products are becoming available that help companies, professional investors and even regular folk to hedge themselves against movements in home prices.

The Chicago Mercantile Exchange, the world's largest futures exchange, is plans to introduce new contracts in April tied to home prices in ten cities including New York, Chicago and Los Angeles.

Earlier this year, online derivatives exchange HedgeStreet introduced contracts based on the future median price of single-family homes in Chicago, Los Angeles, Miami, New York, San Diego and San Francisco, as published by the National Association of Realtors

The U.S. residential real estate market is worth almost $19 trillion, according to Federal Reserve data, making it bigger than the stock market and almost as large as the fixed income market.

But unlike equity and bond markets, until now there's been no liquid market or other efficient way to hedge the risks of movements in real estate. The lack of such tools has become more evident as the recent housing boom has pushed the industry into an even more prominent role in the U.S. economy.

The CME's contracts are mainly designed for companies whose fortunes are tied to real estate markets, such construction firms, developers, mortgage lenders and real estate investment trusts, Craig Donohue, chief executive of the exchange said.

He also expects interest from hedge funds looking to bet on the direction of house prices and said the contracts will also be available to individual investors or the 75 million or so homeowners in the U.S.

The contracts are part of a new clutch of new products that the CME hopes will help to sustain strong revenue and profit growth.

"We're hopeful that it will be a significant contributor," Donohue said. "These are large important risks that need to be hedged."

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-- December 13, 2005