How To Use Housing Futures To Protect Against Losses In Real Estate

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Futures contracts allow a person to buy or sell a specific amount of a product on some specific date in the future.

For example, an Iowan corn farmer may be nervous about how the winter will impact his 2007 harvest.  So, to protect his income, he can buy futures contracts that guarantee a buyer for his crop at a specific price in June 2007.

Regardless of the market price for corn in June 2007, the farmer can know exactly what price he'll get.  If market prices are higher than what his Futures contract is for, he loses.  If prices are lower, he wins.

The Merc provides a helpful Web site to learn more about the product.

Bankrate.com's Jay MacDonald penned a very smart piece about how savvy real estate investors can use the Housing Futures markets to hedge against losses in home equity, or exposure to declining real estate markets. 

It is an interesting concept that homeowners can protect their "income" just like the corn farmer from Iowa.  Imagine some of the goals you could accomplish:

• Plan to avoid capital gains taxes by keeping your net proceeds below $500,000 for married couples; $250,000 for singles
• Know exactly how much money you will have for a downpayment on your next home
• Combine Housing Futures with a Mortgage Rate Futures Market and lock your next loan years in advance
• Remain fully-leveraged on your home and use the extra equity for investment and retirement

The list goes on.

Or, as noted by University of Houston's Bauer College of Business Finance professor Craig Pirrong, the Futures markets can give people with a $50,000 minimum investment the chance to speculate on real estate markets without buying homes directly.

In buying financial instruments that mimic real estate markets, a real estate investor can avoid all of these arduous and costly steps:

• Buying a home
• Paying closing costs
• Finding tenants
• Paying for maintenance
• Insuring the home

And, in theory, Futures Contracts are much more liquid than an actual investment property so it can be sold immediately.

Source
Housing Futures to Allay Bubble Fears
Jay MacDonald
Bankrate.com

http://www.bankrate.com/brm/news/real-estate/20060810a2.asp