"But the ability to trade has occurred. It's not going to leave. The volatility is too huge."
    As of his data on Sept. 28, the CME product had 1,105 open options, with the bulk-505 open options-hedging on the Los Angeles home price index, he reported. There were 1,441 open futures contracts worth close to $86 million. Miami had the most open futures contracts, 300.
    Siebel agrees with Altfest that the one-year term limit is a major problem with the CME contracts. But he anticipates the Chicago Mercantile Exchange will increase the term to five years, a move that likely would encourage more investors to go long. Chicago Mercantile Exchange spokeswoman Mary Haftenberg said the CME planned to increase the maximum term, but only to two years.
    Before the Chicago Mercantile Exchange product, Siebel says he largely hedged real estate with swaps based on the Office of Federal Housing Enterprise Oversight index. But those were over the counter. The Chicago Mercantile Exchange housing price futures and options, on the other hand, are listed with the Commodity Futures Trading Commission, a factor that gives it more clout with traders.
    The only other program similar to the Chicago Mercantile Exchange program at this writing was believed to be offered by HedgeStreet.com, an electronic marketplace. It also has products listed with the Commodity Futures Trading Commission.
HedgeStreet offers housing "binaries," which work similarly to options. You buy if you think the market is going up, or you sell if you think it's going down. Prices of contracts, which have quarterly terms, are posted in its online order book. If a transaction fails to draw both a buyer and a seller, it doesn't happen.
    Russell Andersson, a HedgeStreet.com founder, says the potential of the real estate derivative market is greater than the real estate market. "Derivative markets tend to be larger than cash markets," he said. "They're a more effective way of transferring risk. They're easier to trade, and transaction fees are lower.
    "We use the National Association of Realtors Index," he said. "They (the Chicago Mercantile Exchange) use the Case-Shiller. The indexes are pretty similar."
    But Case-Shiller, he acknowledges, does a better job.
    HedgeStreet.com's housing binaries are $100 contracts. The Chicago Mercantile Exchange contracts were running $50,000 to $60,000, depending upon the index selected.
    The contracts also are structured differently. They (traders on the CME) buy futures based on a dollar value. Andersson's contracts are bought strictly on the basis of whether they are going up or down.
He also says that you needn't pay a brokerage commission, just a trading fee of $1 per $100 contract.
    Say an index is trading at $30. It means there's a 30% probably of housing values going up. If you're right, you get paid out of the $100 total value of the contract, so you're risking $30 to win $70. If you thought the market was heading down, you'd make the opposite trade, and risk $70 to get $30.
    "Ideally we'd like it to be used for hedging, but before we get there, there needs to be a critical amount of liquidity," Andersson said. "The volumes are relatively small. You're talking in the tens of thousands of contracts traded in any given quarter."
    With heavily margined futures, Andersson notes, you can lose more than you expected. With the HedgeStreet binaries, he says, the worst-case scenario is that you would lose the amount you're risking.
    Siebel admits his commissions are more expensive for trading CME futures and options than for trading stocks. That's because if someone wants to trade, he has to go out and find the other side of the transaction. "It's just not there." However, Chicago Mercantile Exchange spokeswoman Haftenberg notes that commissions are all over the lot. "We're very pleased with the volume," she said, noting that since May 28, it has been trading 45 to 50 contracts daily-some 3,200 as of the end of August.
    In Europe, derivatives on commercial and residential real estate have been trading since at least last year. That market has grown to more than $2 billion, according to Siebel.
    In this country, Siebel anticipates more products to help hedge some of the real estate market's value, including insurance products, exchange-traded funds and other financial investment products. He envisions first-house funds for children. Down the road, he anticipates mortgages that will lower the rate, based on housing prices.

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