Hedging house price risk: Portfolio choice with housing futures

We assess the economic benefits of having access to housing futures for homeowning investors, using a model for the portfolio choice between stocks, bonds of various maturity, different mortgage types, and housing futures. We compare the utility gains of housing futures with the economic benefits of two other important housing-related portfolio decisions: (i) incorporating the housing exposure in financial portfolio choice and (ii) mortgage choice. Our analysis indicates that the portfolio implications and welfare improvements of the housing futures are small. This is due to (i) the large remaining idiosyncratic house price risk which cannot be hedged using city-level housing futures and (ii) an offsetting speculative demand for housing futures.