Home price futures, coming to an exchange near you.

[swag]

Soon people will be able to sell the housing bubble (or localized bubbles) short.

Yale Economist Robert Shiller (not party affiliatled, though he has donated to Dem campaigns, and did a good job of dissecting Bush's Social Security rip-off, both in speeches and in print), author of two editions of Irrational Exuberance (the first edition being a funny, caustic, and prescient work about high stock prices in the late 1990s, the more recent edition addressing the real estate bubble), published The New Financial Order a few years ago, in which he discussed the creation of new instruments through which individuals could hedge such personal risks as unemployment, falling home prices, stagnating economies, etc.

Now Shiller writes about a new market in home price futures that he helped create, that are set to trade on the Chicago Mercantile Exchange in the months ahead:

http://www.project-syndicate.org/commentary/shiller36/English

Within a month, the Chicago Mercantile Exchange (CME), in collaboration with my company, MacroMarkets, as well as Fiserv and Standard & Poor’s, will launch futures and options contracts on home prices in ten cities in the United States. The contracts will be settled on the S&P/Case-Shiller Home Price Indices, which developed out of academic work that my colleague Karl Case and I pioneered almost twenty years ago. For many years we have been campaigning for housing futures, but no exchange wanted to use such indices to create a futures market until now.

The futures markets on home prices will allow investors around the world to invest in US homes indirectly, by buying interests in them through these markets. An investor in Paris, Rio de Janeiro, or Tokyo will be able to invest in owner-occupied homes in New York, Los Angeles, and Las Vegas.

A fundamental principle of financial theory – “diversification” or “risk spreading” – implies that interest in the new contracts will be high. People and businesses in New York, for example, are overexposed to their local real estate risks, so they should reduce this risk by selling New York home price futures. People in Tokyo will assume some of this risk by purchasing New York home price futures if the price is right. The New Yorkers still live in their own homes, but now they have spread their investment risk worldwide.

A genuine futures market on single-family homes has not been attempted since 1991 when the London Futures and Options Exchange (now merged into Euronext.liffe) failed in its effort to launch such a market in Britain. That attempt never generated much trading volume. The Exchange threw a party and no one came. British spread-betting markets for home prices, and some retail online markets, have never amounted to much either. . . .

There is a lot of analysis and commentary at Mark Thoma's great blog here and here.

Some will find this interesting, others (like me) will have fun trying to get their brains around it, and others will see dark games being played. Bully for all!

[unblock]

1. cool!