housing futures

Futures on house price indices, based on the S&P/Case-Shiller Metro Area Home Price Indices, now trade at the Chicago Mercantile Exchange

formatting link

. The bid-ask spreadsof the national August 2008 and November 2010 contracts are about 1.4%and 4.2%, and the current mid-quotes are 200 and 177.1. The Nov 2010contract trading much lower than the August 2008 contract reflectsexpectations that house prices will continue to fall. Converted to an annual expense ratio, (4.2%/2) * (1/3) is about 0.7%

-- the justification for the 1/2 factor is that the contracts are cash settled and could be held through expiration. Someone who wants to speculate that house prices will not fall as much as the Nov 2010 futures predict could find buying the futures contract to be less expensive than buying an investment property. Someone who has a lot of wealth tied up in their home could sell the futures to hedge price risk.

I'm not recommending anyone go long or short, just thinking out loud. I don't work for the CME or a futures brokerage, but I do trade for my own account and work for a firm that trades futures.

I was just having a discussion about these with another finance type who lives in a city that will remain nameless, but whose CME futures' pricing is "curious," at least based on the delayed quotes on that site you linked to.

One concern is that there doesn't appear to be any volume for those longer-dated contracts, so I don't know how valid the quotes are -- or even how they're determined (if there are no transactions, how can there be any price discovery?).

And really, I've only read about these in the hypothetical, where Shiller talks about hedging exposure to housing using derivatives tied to his indices. But I haven't followed how it's been implemented...like who is the counterparty, and how do they make good on settlement? There's nothing akin to that big oil storage facility in who-knows-where Oklahoma. A big tank full of Edwardian flats.

-Tad