Pork belly’s, orange juice, and real estate future contracts. These are some of the things that will now be traded on the Chicago Mercantile Exchange trading floor. The addition of the contracts will allow folks (hedge and pension funds mostly) to trade on the future of real estate.
What is interesting is whether this form of trading will have any effiect on the actual housing market or not. As we have seen in the past year, future trading has had a significant impact on the price of oil and made the swings in price much higher than may typically have been expected based solely on a supply and demand ratio. Can they have the same effect on the housing market? Or will the much greater buying public have a greater impact on the pricing model.
The contracts, based on indexes developed by San Francisco-based Global Real Analytics LLC, will begin trading in the first quarter of 2007, the Merc said. The exchange will list 10 cash-settled contracts: a composite index, five regional indexes and contracts based on retail, office, apartments and warehouse properties.
“There’s quite a bit of risk out there,” said Felix Carabello, the Merc’s director of alternative investment products, alluding to the commercial market. “The residential market gets all the buzz because there are more investors and there are more owners of residential real estate than commercial.
“The home as an asset has changed. Now it’s also a wealth-producing asset that can be monetized. As the [residential] market is starting to go a little bit soft, you have folks that are … a bit nervous, and they are trying to find different ways to hedge to protect that investment.”
Chief Executive Craig Donohue is expanding the Merc’s reach into real estate in a bid to capture interest from money managers to hedge funds seeking to protect against losses or boost returns. The Merc listed futures on residential housing in May. via Chicago Tribune.
