Index- Based Futures And Options Markets In Real Estate

TLDR

Real‑estate portfolios are often undiversified, with many holdings concentrated in specific regions or types, leaving them unhedged, and related institutions such as home‑equity insurance could arise around these markets. The authors propose opening cash‑settled futures and options markets on real estate to improve diversification and hedging. They argue that such markets would overcome limitations that have hindered other real‑estate hedging instruments. Establishing these markets is expected to increase the quantity of reproducible real estate, lower rents, reduce speculative price swings, and dampen the business cycle.

Abstract

Most institutional and individual portfolios are very undiversified in real estate: many hold no real estate at all, many have holdings highly concentrated in certain regions or types of real estate. The risk of these concentrated holdings is not hedged. We propose here that cash-settled futures and options markets be opened on real estate to better allow diversification and hedging, and show that these markets solve problems that have hampered other real estate hedging media in the past. Related institutions, such as home equity insurance, might develop around the futures and options markets. The establishment of these markets is likely to increase the quantity of reproducible real estate, and lower rents on real estate. It may also reduce the amplitude of speculative real estate price movements and dampen the business cycle.