THROUGH THE ROOF.(The Talk of the Town)(insurance industry)

On September 2, 1666, fire erupted in a bakery on Pudding Lane in London. The fire quickly spread and raged for four days, ultimately destroying four-fifths of the city. To make matters worse, Londoners had been living without a simple but invaluable financial tool: fire insurance. Although the idea of fire insurance had been around since the early sixteen-hundreds, most people thought of fire as an act of God, and therefore not something that could be reasonably insured against. The Great Fire changed that. Soon after the city was rebuilt, a man named Nicholas Barbon opened up the Fire Office insurance company, and by the end of the century fire insurance was a thriving business.

Today, we insure our homes against fire as a matter of course. And cautious homeowners can also protect themselves against disasters ranging from windstorms and floods to earthquakes. There is one much feared cataclysm, though, against which everyone has so far been defenseless--a housing-price slump. Seemingly every magazine and newspaper in America has now prophesied the imminent bursting of the housing bubble. But even though many Americans have invested all, or almost all, their net worth in their homes, they've had no way of insuring themselves against that asset's value taking a severe tumble.

That's all changing. At a new online site called HedgeStreet, investors can bet on changes in home prices in certain cities. And later this month the Chicago Mercantile Exchange is going to start trading futures contracts pegged to housing-price indexes in ten major metropolitan areas. The Chicago plan, which is the brainchild of two economists, Karl Case, of Wellesley, and Robert Shiller, of Yale, is straightforward: if you just spent, say, $1.5 million on a two-bedroom apartment in Manhattan, and you want to hedge against the risk that it might be worth $1.2 million three years from now, you can sell contracts that will reap you a profit if local prices fall, allowing you to lock in the current value of your home. Alternatively, if you think the housing boom in Los Angeles still has a ways to run--or if you're interested in buying a year from now but are afraid that you'll be priced out of the market--you can place a bet that will pay off if prices keep going up.

If housing futures work the way they're supposed to, they will shift risk from those who are less able to bear it (individual homeowners with hefty mortgages) to those who are more willing to (speculators looking for a big upside on their investments). In the process, they will effectively provide a form of house-price insurance. They could have wider benefits, too. If there is a housing bubble, and it does burst, housing futures would soften the blow to the national economy. If enough traders participated in the market, it would become, in the long run, a valuable predictor of housing ...