Not all futures contracts succeed in gaining trader adoption. Exchanges try to list many contracts. They then quietly delist those that languish in obscurity. Successful launches are rare. Creation of whole new categories of contracts is even rarer and happens about once per decade. The 1970s saw adoption of currency and interest rate futures and the 1980s followed with equity index futures. The 1990s were a fallow decade, and the only successful category launch in the decade of 2000s came from CBOE’s listing of VIX volatility futures.

This month, May 2021, brings the 15 year anniversary of the launch of real estate futures in the US. Based on the Case-Shiller home price index, CME listed futures contracts on house prices in the top 10 US urban areas, as well as a future contract on the composite index covering all of the United States. The timing would seem to be perfect. The US was going through an unprecedented housing bubble that was followed by the biggest bust in history. Real estate futures would allow banks, mortgage companies, housebuilders, and real estate investors to hedge the market risk and protect them from a downturn.

Case-Shiller index since inception

Yet the market gained no traction. Nobody traded house price futures, nobody hedged their exposure, and we ended up instead with the global financial crisis. Unhedged banks and speculators were going bankrupt left and right, the financial system seized up and we came within a hair’s breadth of total collapse. Rather than reducing their risks, the world’s financiers chose to lever up over and over in a mad carnival of greed.

And when the housing bubble collapsed, they were bailed out.

Even now, 12 years after the crisis, it’s not entirely clear how much money did the government pump into the financial system to save it. Estimates range from $700 billion on the low side (which is just the size of the direct commitment of the U.S. TARP program) to $29 trillion on the high side. We’ll never really know the exact number because it’s in nobody’s interest to reopen this can of worms.

If all of the world’s central banks come to your rescue when you’re in trouble, why bother hedging?

House price futures lanquished on the CME since then. There’s only one reason they’re still listed: the perseverance of John Dolan, a marketmaker who single-handedly keeps the market alive. John quotes both sides of all the listed contracts, represents half of total open interest, and promotes house price futures relentlessly on his blog. Despite his efforts, annual volume averages less than 200 contracts. With each contract worth less than $100,000, that represents a few dozen houses at best.

John recently published a retrospective look at his experience with house price futures. He’s way more diplomatic than I would be. He graciously acknowledges everybody who made the contracts possible and participated in trading it. He lists the reasons he heard for the low volumes. And he expresses hope that more people will start using the contracts. After all, real estate is, by far, the largest investment for most people, and it is the largest asset class in the US.

We have seen what happens when leveraged unhedged speculation runs rampant in the housing market. Let’s use the tools we have available to prevent a meltdown happening again. Government and central bank balance sheets are stretched enough already. They can’t take another hit of the magnitude of the 2008 crisis. Wider use of house price futures would allow us to manage and price the risks better, give us advance warning of impending problems, and spread the costs of a downturn across willing market participants. It is in all of our interest that they succeed.