Housing games.

Is it time to hedge your home?

While predicting home-price movements is as dicey as long-term weather forecasting, there's reason to believe that home prices may be easing. If you are bullish on the $15 trillion U.S. residential market, it may be time to curb your enthusiasm. The median home price in Los Angeles County last month was just 0.2 percent above July's level, a signal that the long-anticipated cooling off might be under way.

The possibility of a bubble has inspired a leading financial economist to create a derivative based on home prices. Robert Shiller, a Yale economics professor and author of "Irrational Exuberance," has repeatedly warned that bubbles are forming in several markets, mostly concentrated on the east and west coasts. He's also a partner in a firm called Macro Securities Research LLC, which is creating a "Macro" security that will be based on a reference index for home prices in several urban areas.

Shiller's firm will be selling the securities later this year. They will be sold in pairs to offer investors a chance to bet that home prices wild increase--or decline--in the largest markets.

An "up" security would be a bet that home price indexes will rise, while its "down" is a wager that prices will fall and provide a hedging instrument. The vehicles may also be tradable and pay a dividend. "People who don't want to play the game don't have to play the game," Shiller said. "You can own a home and hedge it."

Hedgestreet, which is slated to become available to investors in October, is also offering trading vehicles based on housing prices. Trading what it calls "Hedgelets," the retail derivatives exchange company will offer contracts also indexed to regional housing prices in the Chicago, Los Angeles, Miami, New York, San Diego or San Francisco metropolitan areas.

The Hedgelets are based on the quarterly housing-price indexes of the Office of Federal Housing Enterprise and Oversight for those areas. For example, if you wanted to buy a Hedgelet for the L.A. market, you would buy a minimum $10 unit representing a "yes" or "no" decision on whether housing prices would rise more than the agency's latest housing average for that market.

The best hedge against the possibility of home prices falling may be to realize that homes are subject to boom-and-bust cycles, just like securities.

If you're a short-term investor and you think your local market has peaked (properties are staying on the market longer, lower bids are being accepted), it may be a good time to sell if you need to lock in a profit. No need to contemplate a decision, though, if you plan to hold your property for a few years.

Calculate the percentage that home equity represents of your net worth (assets minus liabilities such as credit-card and mortgage debt). If home equity represents more than 60 percent of your net worth, consider diversification to reduce your exposure to housing risk by adding bonds, stocks, Treasury-Inflation Protected Securities and commodity funds.

Of course, you can't sell a piece of your house the way you could unload a stock or mutual fund. While certainly not a perfect hedge, if real estate prices head south, diversification can offer some shelter from the storm.