The Chicago Merc has announced that it will introduce housing price futures in April 2006. This may shift the speculative frenzy away from real-estate into a financial instrument that measures the level of speculative frenzy in real estate. A fine distinction, but one worth making.

Personally, I don't like the idea one bit. It's one thing to have a futures contract on a bushel of wheat or a company's stock. There's an underlying commodity in a liquid exchange, and it's both very difficult and very illegal to manipulate the price of that underlying commodity. For example, if I buy futures on wheat expecting the price to go up, I can't cause a drought to further my interests. Similarly, if I sell futures on a stock, the only way I could manipulate the price of the underlying stock would run afoul of SEC regulations.

But with housing-price futures, what's to stop someone from buying their way into City Hall in order to influence local politics in such a way as to introduce distortions — either positive or negative — to housing prices? There are just too many ways for unscrupulous operators to manipulate local home-price levels in ways that would be harmful to communities. For example, if I placed a huge, pure-play bet that home prices would fall beyond expectations, I'd have an incentive to throw money at local politicians who'd cut budgets for schools, police and fire. Or, if I wanted home prices to rise, I'd want to pay off the mayor to not make any decision that could possibly jeopardize the rise in local home prices, no matter the impact on residents.

That's not to say such unscrupulous behavior isn't already happening. It's just that making it so easy will bring a great deal more money to the table, which might make for a rocky future for those living in one of the 10 cities slated for coverage by housing-price futures.

- AP article.

- CME's Sept. 27th announcement

- CME's earlier announcement of a letter of intent with MACRO Securities Research and Fiserv/CSW.

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