The Housing Futures Are Coming
We all know the arguments in favor of this market, and the latest contract details will soon be posted by the CME, so let's skip directly to the concerns voiced by attendees.
First and foremost, inquiring minds wished to know who the buyers would be. Hedging sellers abound from individuals to homebuilders to mortgage issuers and federal agencies to local governments. The natural buyers would be prospective home-buyers, trying to ensure that they aren't priced-out of the market, but the relative wealth of that group is - naturally - very small. This is by no means a fatal problem, but it is an obstacle to the market realizing volume and liquidity.
Ideally, the abundance of non-information traders (hedging sellers) would attract speculative buyers. Speculators, however, may be unwilling to stand against the massive weight of hedging, especially with such an infrequent spot price. Fortunately, it was announced that updates on the quarterly index would be released monthly on the last Tuesday of each month. It was suggested that the existing housing-related data releases such as sales, permits, starts, and completions would help to fill in the data void. Karl Case added that traders would no doubt gather their own information and that the futures would come to reveal this. Whether or not enough information can be gathered to overcome the influence on price of hedging, especially at the national level, is an open question. Robert Shiller noted that the term structure of the futures would likely settle into backwardation.
Lack of transparency and the "black-box" nature of the index was another big concern. Happily again, CSW announced that they would soon be publishing the full details of the methodology. Thus two of the major infelicities mentioned here in November were rather squarely addressed.
While most of the concerns dealt with the viability of the futures market itself, there was also the worry that the contract would increase the volatility of the underlying real estate, otherwise a relatively calm asset class. Robert Shiller brushed this off, saying that housing was already "like the stock market", a danger a questioner had posed. Dr. Shiller also noted the possibility of home prices being quoted in terms of futures prices. That is, rather than a fixed amount, the asking price might be advertised as some multiple of the appropriate regional index. That separate, earlier remark probably did little to sooth the worries of whoever asked the volatility question.
Skepticism inevitably surrounds new markets. Dennis Gartman recalled the eyebrows initially raised, for instance, at Nymex's crude oil futures. Again, residential real estate in the US tallies in at approximately $20 trillion dollars. One basis point (one percent of one percent) of 20 trillion is 2 billion, so volume may be impressive despite the worries. In terms of popularization, there was a good deal of talk concerning indirect trading of the futures, and it was suggested that most individuals would actually come into contact with the futures through OTC instruments packaged by institutions or through index-linked mortgages. An AMEX ETF tied to the index is also in the works.