Hedging house price risk: Portfolio choice with housing futures

We assess the economic bene¯ts of having access to housing futures for home-owning investors, using a model for the portfolio choice between stock, bonds of various maturity (including mortgages) and the housing futures. We compare the utility gains of housingfutures with the economic bene¯ts of two other important housing-related portfolio decisions: (i) incorporating the housing exposure in ¯nancial portfolio choice and (ii) mortgage choice. Our analysis indicates that the portfolio implications and welfare improvements of the housing futures are small. This is mainly due to the large remaining idiosyncratic house price risk which cannot be hedged using futures written on a city-level house price index.