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| The Futures of Housing |
| Written by Jonathan Smoke | |
| 04.24.2007 | |
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Discuss this article on the forums. (0 posts) We decided to launch HousingIntelligence a little ahead of schedule in honor of Real Estate Derivatives World, the first and only event dedicated to Real Estate Derivatives in the USA. I will be making posts from the conference each day to summarize what I am learning about derivatives and the likely future of derivatives based on US residential real estate.  For those interested in housing futures, you may also be interested in the white paper that Bill Russell and I submitted to the attendees of the conference.In Overcoming Basis Risk as a Major Obstacle in the Adoption of Housing Futures as a Hedge, we explore one of the major obstacles that we think stand in the way of builders and developers adopting exchange traded housing futures to hedge specific property investments: the purported blunt nature of the market-based futures that presumably carry significant basis risk. Here’s an excerpt from our conclusions: “Our initial analysis has revealed that, at least within the two sample markets chosen, exchange traded futures based on the MSA level Case-Shiller indexes do correlate strongly with the majority of the neighborhoods in which real properties reside. However, there is significant basis risk for those neighborhood block level groups that are not correlated with the MSA level index. Furthermore, there is significant variation in risk across neighborhoods as measured by their betas or relative volatility compared to the MSA level index. This implies that even when there is tight correlation, the relative volatility needs to be taken into consideration in order to have an effective hedging strategy.”
As we get the Intelligence part of HousingIntelligence built out over the next several months, we will be expanding our research to produce repeat sales home price indices beneath the MSA level for all of the markets currently traded like the ones we produced for Chicago and Denver in the paper. We think housing intelligence about local markets that goes far deeper than an MSA will be a vital part of any serious investor’s attempt to develop an effective hedging strategy. And by providing such information, we hope we are part of the tipping point for real growth in the futures of housing. 
We're always looking for feedback from our readers.
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