RENEE MONTAGNE, host:
There are new signs that the hot real estate market is cooling off. Sales of existing homes fell 2 percent last month, and the average price of homes rose at the slowest pace in 4.5 years.
Alongside the real housing market, there's now a kind of shadow market on the Chicago Mercantile Exchange, where housing futures are being traded like pork bellies or foreign currencies.
NPR's Scott Horsley reports from one of those markets: San Diego.
SCOTT HORSLEY reporting:
This downtown neighborhood around Petco Park, where the San Diego Padres play baseball, is one big condo construction zone. High-rise condominium towers are sprouting up in all directions, and cement trucks line the narrow streets.
Standing on a busy corner, real estate agent Donna Lilly(ph) unfolds a map to show her client, Gary Olsen(ph).
Ms. DONNA LILLY (Real Estate Agent, San Diego, California): Look at all the high-rises.
Mr. GARY OLSEN: I mean, there's a crane on every corner.
Ms. LILLY: There's a crane on every corner and it's not quiet. But at nighttime it is quiet. In the daytime it's filled with activity.
HORSLEY: This neighborhood has added nearly 12,000 condominiums in the last decade, and thousands more are on the way. Olsen wonders how long it can last.
Mr. OLSEN: I don't know where all the buyers are going to come from, to tell you the truth. I mean it seems like it's going to be over-built before too long.
HORSLEY: And, like the Padres, who just slipped from first in their division to last in a single week, the booming local real estate market could be in for a rough patch.
That's one of the reasons for the new futures market, dreamed up by Yale economist Robert Shiller.
Professor ROBERT SHILLER (Professor of Economics, Yale University): Somebody who has just bought a house in San Diego, and is lying awake nights saying, what if prices drop 20 or 30 percent? Well, you don't have to just worry now, you just sell a futures contract. You can put a floor on the value of your house.
HORSLEY: San Diego is one of ten metropolitan markets that began trading this week on the Chicago Mercantile Exchange. The new futures contracts don't represent actual homes. Instead, they're based on an index of home prices in each city.
The idea is that a developer, for example, who's planning to sell houses in a year's time, could lock in a price today. Then, even if the market falls, he's protected.
Sayee Srinivasan, of the Mercantile Exchange, says contracts could also be used to guard against an upswing in the market.
Mr. SAYEE SRINIVASAN (Associate Director of Research, Chicago Mercantile Exchange): Say I'm based in Chicago and my company is going to be transferring me to San Diego. My concern would be, what if prices keep going up? I might be interested in buying some futures contracts so that I'd locked in my purchase price.
HORSLEY: Even for people who aren't planning to buy or sell real houses, the new futures market offers a way to speculate in real estate without putting a lot of money in a single property. So far, trading is light. Observers say housing futures could take a couple of years to catch on.
The market's designed primarily for big investors, like developers or banks, but Shiller thinks eventually there will be insurance products that let individual homeowners hedge their risks just like the big guys.
Mr. SHILLER: Right now, when you buy a house, the buyer would be naturally worried that the home price will fall by more than the down payment, and it really wipes them out. So there could be a mortgage that says don't worry, we won't let that happen.
HORSLEY: Shiller, who famously predicted the stock market correction in his 2000 book, Irrational Exuberance, suggests homeowners might want that kind of protection if the housing market also turns out to be overpriced.
Scott Horsley, NPR News, San Diego.
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