Pension funds and money managers will soon be able to tap into the $22 billion residential housing market.
Goldman, Sachs & Co., New York, last month announced the firm will soon roll out new instruments including forwards and total-return swaps that will enable institutions to take bets on the direction of housing prices in 10 major metropolitan markets from Boston to San Francisco.
At $22.2 billion as of March 31, the U.S. housing market is one-third bigger than the domestic equity market, valued at $16.4 billion, and approaches the size of the $25.9 billion U.S. bond market, according to Goldman data.
There has been no good way of investing in that market short of buying actual properties, said Rajiv Kamilla, a vice president in Goldman's structured products group. Goldman primarily will rely on housing indexes marketed by MacroMarkets LLC, Madison, N.J., in designing its derivative instruments.
"Housing has low volatility and high returns relative to other asset classes," said Sam Masucci, chief executive officer of MacroMarkets, which licenses financial applications of the S&P/Case-Shiller Home Price indexes.
Those indexes were developed in the 1980s by Karl Case, an economics professor at Wellesley College, Wellesley, Mass., and Robert Shiller, an economist at Yale University, New Haven, Conn., and author of "Irrational Exuberance," the well-known book about the late 1990s tech-stock bubble.
MacroMarkets is negotiating to license the indexes to other dealers. Mr. Masucci declined to name the firms.
The Chicago Mercantile Exchange launched futures and options based on the indexes in May, but volume has been low, with total open interest of 1,536 contracts of as Oct. 11. Mary Haffenberg, a CME spokesperson, said the contracts were geared for individuals, not institutional investors, and it takes awhile to educate potential investors in a new product.
The CME contracts also have maturities of up to only 13 months, which is less useful for institutional investors.
In contrast, the Goldman contracts will have maturities up to five years. Pension funds and endowments, which could use the contracts to help hedge against inflation, likely will seek contracts of four to five years in maturity, Mr. Kamilla said.