On Monday the Chicago Merc is planning to launch futures and options based on real-estate prices in 10 U.S. cities: Boston, Miami, New York, San Diego, San Francisco, Washington, D.C., Chicago, Denver, Las Vegas and Los Angeles.
Nicely timed to fail (he ironically says), as this Merrill economics report makes obvious:
We have just experienced one of the most impressive housing cycles on record, but it has quickly come to an end — so much so, in fact, that housing starts have fallen at a 56% annual rate over the past three
months, a turndown of sudden proportions that we have not seen since the opening months of 1991.
[Update] Breakingviews does a nice job of explaining why the CME’s home hedge is likely to flop:
What makes for a successful futures contract?
From the start, there must be demand from both buyers and sellers and hedgers and speculators. Futures markets need liquidity to survive. It’s also useful if the derivative’s underlying assets or commodities are uniform.
… Unfortunately, housing futures don’t meet these criteria. First, there’s a danger the market will be one-sided. Many people may want to hedge their housing exposure, including holders of mortgage-backed securities, home builders and banks. Only speculators and investors have an interest in going long housing futures. They could be deterred if the real-estate market were to tank.
There also are problems with hedging the house. Homeowners might want to sell short futures to protect themselves against a housing crash. But if prices kept on rising, they would face a cash drain from losses on their futures positions. Institutional hedgers face a different quandary. The Merc’s housing futures will be priced off the regional S&P Case-Shiller housing indexes. It’s unlikely these indexes will match the housing exposure of anyone seeking to unload risk. Further, as traders can’t sell houses short, there’s no mechanism to keep the futures in line with spot prices.