Hedging house price risk with futures contracts after the bubble burst

- Dynamic hedging strategies do not effectively manage systematic house price risk.
- Minimum variance hedge ratios were suboptimal to a naïve hedge during the financial crisis.
- The inability to effectively hedge is one reason why real estate futures may never be successful.

This paper extends the existing literature on managing house price risk. While previous work finds that a hedger would have reduced a large amount of variance in housing returns in Las Vegas, Nevada using Chicago Mercantile Exchange (CME) futures contracts, we show that neither static nor dynamic strategies would have maintained an effective hedge during the significant decline in housing prices. The inability to hedge house price risk using CME futures contracts ultimately calls into question the long-term viability of housing futures.