The increase in housing prices and loan interests
One of the largest potential markets for property derivatives is the United States. In 2007, the Chicago Mercantile Exchange and Global Real Analytics estimate the US property derivatives market to grow to US$ 106 billion in three to five years.
In the past two decades, the US housing market has experienced strong growth. In the early 1980s, the median home value in the US was about US$ 60 000. By the end of 2004, it had grown to US$ 190 000. From 1999 to 2004, house prices on the coast sides more than doubled.
This increase in housing prices was paralleled by declining mortgage rates. In the early 1980s, mortgage rates approached 18 %. Then they gradually decreased to 6%by 2000. Given today’s high prices and the recent increase in mortgage rates, there is much speculation about what lies ahead. However, even if housing bubbles exist and do not burst, minor shifts in value and sales can result in substantial losses for entire sectors of the economy. Such an overheated market attracts both investors that seek a hedge and speculators. The possibility to transfer the market’s risk is thus becoming more important. Actually, the decline in house prices in 2007 that triggered the so-called subprime crisis has brought more attention to the property derivatives market and its hedging possibilities.