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Posted by on December 10, 2007, 3:25 pm
Futures on house price indices, based on the S&P/Case-Shiller Metro
Area Home Price Indices, now trade at the Chicago Mercantile Exchange
http://www.cme.com/trading/prd/re/housing.html . The bid-ask spreads
of 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 2010
contract trading much lower than the August 2008 contract reflects
expectations 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.
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