Home-Price Indexes to Launch

By John Spence
Saturday, March 25, 2006

BOSTON -- Homeowners and real estate investors nervous about a bursting of the housing bubble will soon have new tools to hedge against a pullback in home prices.

Standard & Poor's Corp. said this week that it plans to unveil home-price indexes for 10 cities in the second quarter. They will serve as the basis of cash-settled futures and options contracts expected to launch in April.

"For the vast majority of Americans, their home is their largest and most valuable asset, and in a period of rising housing prices and increased concerns about a possible housing bubble, reliable information on their biggest asset is extremely important," said David Blitzer, chairman of S&P's index committee.

The McGraw-Hill Cos. subsidiary said it has teamed with the research affiliate of MacroMarkets LLC and informational-management systems provider Fiserv Inc. to launch the family of indexes measuring residential housing prices in the United States.

The 10 metropolitan indexes will be for large cities including New York, San Francisco, Chicago and Washington, and there will also be a weighted composite index of home prices, S&P said. Chicago Mercantile Exchange Inc. will list futures and options contracts on the indexes, according to a statement. CME spokesman Allan Schoenberg said the exchange has set a launch date of April 26 for the derivatives.

The indexes will be called the S&P/Case-Shiller Metro Area Home Price Indices and use calculation techniques developed by economics professors Karl E. Case and Robert J. Shiller, author of the influential book "Irrational Exuberance."

Citing data from the Federal Reserve, S&P noted the value of the U.S. housing market at the end of 2005 was $21.6 trillion -- more than the total market capitalization of the domestic stock market.

In a presentation on the planned housing derivatives, the CME said likely users include home-building companies and individual homeowners who want to hedge the risk that the housing bubble may burst. Additionally, mortgage investors and insurers, government agencies and other mortgage issuers, and hedge funds seeking convenient exposure to housing could also use the derivatives, the exchange noted.

The futures would be priced at the index level times $250. As an example, CME's Schoenberg said the Case-Shiller index for Denver stood at about 133 in the second quarter of 2005. Therefore, the contract would be priced at $33,250. At the high end of the spectrum, Los Angeles's index reading of about 245 at the same time last year would price the contract at $61,250.

The contract months for the futures would be quarterly in March, June, September and December, the CME said. The final settlement date would be one business day after the 25th of the contract month.

S&P's announcement comes during widespread debate over whether there is a housing bubble, as interest rates move up and signs point to slowing sales activity. Homeowners have lacked convenient tools for hedging the risks of movements in real estate prices, but that appears to be changing.

Last week, the Chicago Board Options Exchange said it plans to launch futures contracts in the second quarter based upon median prices in the National Association of Realtors existing-home sales data. The exchange said the futures will track the median sales prices in the United States overall and in four regions in the country: Northeast, South, Midwest and West.

Last year, online derivatives exchange HedgeStreet Inc. introduced derivative contracts based on the future median price of single-family homes in several major metropolitan areas, using data from the National Association of Realtors.

And in February, HedgeStreet and the Chicago Board Options Exchange formed an alliance to develop new products and increase the visibility and liquidity of HedgeStreet's "hedgelets," which allow small investors to trade futures contracts.

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