Do you have a strong opinion on the purported housing bubble? Now you can put your money where your mouth is. In the near future, the Chicago Mercantile Exchange will offer a series of futures and options that let speculators bet on whether home prices are going to go up or go down. According to the International Herald Tribune, The futures will be based on city and regional housing price indices.
Here’s how it would work. If you want to bet housing prices will fall, you would sell a futures contract. Each contract is worth $250 times the index level.
For example, assume that the Miami index is currently at 240, and you expect that will decline in three months. Each contract you sell short (because you don’t yet own it) would be worth $60,000. The contract may actually cost only $5,000 in cash. If the market fell by 20% in six months, the index would be at 192. You could then buy back your contracts for $48,000, making $12,000 on each contract. Because you invested $5,000, you have more than doubled your money. On the flipside, if the market doesn’t drop within three months, your $5,000 investment expires.
Most investors will be using this as a hedge device. Let’s say you are a speculator in Miami condominiums, and are nervous about where the market is going. You could sell the Miami index options to protect your position in case the prices fall precipitously. You’d just have to buy enough contracts to cover the current market value of your properties.
There will be 12 cities that will have a three-month contract available, including Boston, Miami, San Diego, Washington, D.C., Chicago, Denver, Las Vegas, Nev., San Francisco and Los Angeles.
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