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If one is a homeowner, then his short sale of futures in this market is neither bullish nor bearish, merely a hedge. Assuming only that the homeowner doesn't overhedge, and does have some amount of hard equity in his home, settlement of the futures contract presents only a small problem should the market move higher. The homeowner (well, the sensible one at any rate) who hedges into a market than subsequently rises can, and should, settle his exposure by borrowing some of his equity. His only cost will be the carry, which, if the homeowner already has an equity credit line in place, will be limited to the interest on the putative loss. There is no actual loss here, of course; that's what a hedge is all about.

There's one exception to this, but only one. If the value of the homeowner's home in the case described above does not keep pace with the rising index, then the homeowner will actually lose capital. This implies directly that only those with relatively more attractive properties, i.e. ''nice neighbourhoods'' and so forth, should use this market to hedge.

I expect the mortgage industry to make a good thing of this market, as long as it lasts (which I don't think will be very long; see my other posts here), by offering a package of complete hedge services to upscale homeowners. The usual homeowner is not going to be terribly savvy about the possibilities here, and I daresay the mortgage bankers can generate quite nice fees from this service. The fly in the ointment will be the title industry, although they might decide to play here, too -- who knows?

For the most part, I agree with you, and you are correct in that I've never traded futures; only equities and equity options. What is unquestionable is that these new products, like most new products from the geniuses on Wall St./CBOT/CME are designed with the (profits of the) casino in mind.

I just thought it was a sort of interesting concept, and being generally bearish on housing, my fellow bears always ask "how do we bet on housing going down?" Other than shorting or buying puts on the homebuilders or their basket ETF.

Rgds,

Thanks for your insightful comments about this new type of derivative. These new financial tools may help Wall Street, mortgage lenders and banks to hedge their investments. Homeowners will not gain any real benefit by playing this game. Borrowing money in a falling real estate market is folly. Derivatives are a big money game played with millions rather than thousands. The mortgage industry will suffer in direct proportion to risky lending practices over the past five years. Wall Street makes money on all transactions which represents a natural hedge. Fannie and Freddy are probably toast. The possibility of a federal bail out make me cringe.

REIT insiders have been dumping stock like crazy over the past six months. They must know something, do you think?