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Robert Shiller: Hedging Our Housing Futures

After the some of the commentary on my post Spreading The Housing Risk To Create International Consensus [Matrix] [1] in addition to all that I have read about his efforts with CME to create a housing market index, I asked Robert Shiller [2] who developed this index and author of Irrational Exuberance [3] for some thoughts on the general feedback I have been receiving.

Here was his reply:

Jonathan, I am glad to see that there is such interest in these contracts. I and a couple colleagues have been involved in trying to develop these products for over 15 years. We hope at last that we will see them succeed.

The basic thrust of these comments seems to be that there are doubts how a futures contract can function when there is no possibility of physical delivery. One can’t deliver a house in fulfillment of a futures contract. That has been the problem that has delayed the development of these contracts for so long. It is also hard to derive a suitable index for house prices, since houses are not a standardized commodity, houses are all different.

The answer to these questions is not easy to summarize. I would recommend my 1993 book Macro Markets, which considers a lot of the issues.

There are also doubts about who would go long the contracts. But, I think that we are actually in a reasonably good time to find people willing to go long. Long positions in other futures contracts have been good investments over all, and a long position in real estate would be a fundamental diversifying move for investors all over the world.

But, the bottom line is that we will have to see how these contracts work in the real world and see how satisfied investors and hedgers are in them.

You can post this letter if this seems helpful.

I am really looking forward to seeing how these futures are viewed. In other words, let the markets decide.