Any ideas/opinions on how these will trade? Volatility, liquidity, etc? It seems everyone wants to short these especially in miami, meaning buy? Article about it: http://www.cme.com/about/press/cn/05-129HousingIndexAgreement15738.html
What was it that the housing bulls always said? The housing market is local, not national. Housing is not like the stock market. Well now there is a national market and housing will trade just like stocks.
Can only exacerbate any potential decline as you are introducing even more leverage in to an already dangerously leveraged market. Great for traders and corporate investors, probably not very good for the residential home owner.
CME is just a legalized casino, no more. Hedging by ''corporates'' is their justification to get authorization to turn these slot machines on! Look for example at gasoline/crude oil. You'd think the biggest hedging parties in those contracts would be say...airlines or..trucking/shipping companies, right? Well, it turns out most don't even touch the crap because it just introduces more losses for them in the long run.
Presumably "they" don't. This is just like nondeliverable currency futures. Settlement will be in cash based on the index price. Anyone taking the long side is going to be rather exposed. As a result I expect these will trade at a large discount. Regardless of the sentiment of the market, "commercial" buyers will be almost exclusively short and speculators will have to take the long side. Martin
Perhaps I have not taken the time to think it through, but I am not sure how this would negatively affect non-participating home owners. What am I missing?
Because of the housing markets sheer size it makes a compelling asset class for risk transference vis a vis futures. However these contracts will attract zero institutional participation and alas die a quick death. There's NEVER been a successful futures contract without commercial participation. Stock index futures may appear to be a bucket shop casino product but their cog has always been mutual fund hedging, program trading and portfolio insurance. A bunch of hedge funds or IB retail daytraders exchanging opinions does not a great contract make. The biggest problem with these contracts will be the lack of a standardized underlying cash market. Ok, it's an index. An index of what? Commercials want exact contract specifications. They don't hedge oil risk. They trade Brent light sweet crude. Or not just wheat but hard, red winter wheat. No one wants to merely exchange price risk for basis risk. Thus a cash settled housing index, albeit regional, tells a hedger little about what his specific correlation to the index may or may not be. An example. After 9/11 condominium prices in Manhattan fell sharply for several months, yet single family home prices in NJ, LI, CN, and Westchester rose. What good would a hedge in the NY housing future do a commercial in that scenario. Or what if because of high energy prices, smaller more fuel efficient city homes with closer commuting distances out-perform large homes on the fringes of metropolitan areas. The hedging needs of a suburban lender/builder/buyer are diametrically opposed to his inner city counterpart. Back in the early 1990's the CBOT spent millions developing futures for the re-insurance market. Like housing, insurance is a humongous cash market with no central price discovery allowing commercials to transfer risk to speculators. These contracts also failed for much the same reason.