Housing Bets Attract Little Action

If the index increases in value, the developer would lose the futures investment, but he would presumably make money on his property sales.

But the expected demand for housing-futures trading has never fully materialized, especially not at the individual-investor level.

So far, housing futures have been interesting only from an academic standpoint, said Matt Hougan, senior editor of the Journal of Indexes, editor of IndexUniverse.com, and a contributing writer for the Exchange-Traded Funds Report and Financial Advisor magazine.

A big part of the problem, according to Siebel: "unfortunate timing."

The product was launched in 2006, near the peak of the market. And as prices continue to feel as though they are in freefall, one might wonder who -- even now -- would be willing to bet against continued declines.

Someone has to be on the other side of your bet that prices will decline, after all.

"The natural buyer is someone who says, 'I think the market is going to go down but not that much,' " Siebel said.

Or it might be someone willing to bet that values will stay flat or even rise -- the sort of long-shot bet that could really pay off handsomely if it proves correct. "Some are priced pretty attractively," Hougan said.

"The idea that prices will fall that much further . . . there are people who will take that bet."

The tiny trading volume also drives up investing costs via large spreads -- the difference between the ask and bid prices. It's a chicken-and-egg issue, Hougan said. "There was a huge amount of excitement when they started," he said, but little follow-through. "We don't see enough activity. People don't want to trade them if there's no liquidity."

Open interest in Merc housing futures was only about 300 contracts on Nov. 14, for example, according to Shore. By comparison, consider that there were more than 300,000 contracts for wheat -- a well-established market -- on the Chicago exchange that same day.

This lack of liquidity makes housing unusual on the futures market. "Unlike most futures contracts, the underlying housing market is not terribly liquid, as it is difficult to quickly buy and sell actual homes," Shore said. "As a result, market makers in housing futures do not enjoy that ready lay-off mechanism." In other words, they can't buy or sell real wheat -- or, in this case, houses -- to cushion losses.

"This leads to wider bid-offer spreads. This in turn means that housing-futures contracts tend to be held for a longer period," Shore said.

Another issue is the extremely localized nature of real estate if you are trying to hedge for a single house. "We don't have a Zip-code-level market," Siebel pointed out. "When you trade the futures, you're trading the metro area," he said. "That's like buying Xerox and selling the S&P 500."

Or like buying Bethesda and selling Manassas.

Still intrigued? Getting started is simple enough. Although futures are usually a professional investor product, "if you want to do this, all you have to do is open up a futures account and fund it," Siebel said.

But housing futures are not a market for the novice, the broke or the faint of heart, finance experts and financial planners say. Home is "a place you live in, not an investment you need to hedge against," said Marjorie Fox, a financial planner in Reston.

Anyone considering investing in housing futures should make sure they fully grasp how they work, Shore said. "Understanding the underlying indexes and the operation of the futures markets are important."

You'll also need a substantial nest egg. Chicago Merc contract positions generally require $40,000 to $75,000 to invest, money that for many people could probably be better saved elsewhere. Bet wrong, and you could lose your entire investment almost instantly. Bet wrong while shorting futures with borrowed money, and you could find yourself auctioning off your real house to pay the bill.

"Futures are a scary market for retail investors," Hougan said. They require large sums of money and high levels of leverage. The potential for huge profits is there, but so is the potential for loss.

Because of that risk, Hougan said he wouldn't suggest housing futures to anyone other than experienced futures traders.

He is intrigued, though, by the housing-linked exchange-traded funds that MacroMarkets has registered with the Securities and Exchange Commission to sell soon. ETFs can be bought and sold like stocks. "It's less leveraged. And you could buy it without registering as a futures trader."

However, he mainly recommends a more traditional method of protecting your equity: "Pay your mortgage, paint your house, and make sure the roof is still shingled."