Are the instruments to hedge the average condo price in a city? I'm thinking of a future or swap to hedge price exposure, similar to how forward commodity prices can be hedged.
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Not that I know of. It's a stretch, but you might be able to find futures contracts on the NCREIF index (I know they do total return swaps and appreciation swaps), but that itself is a lagging indicator (as it is appraisal based). But that index is highly diversified across regions, also it is a non-levered index (so you would need to match exposure).
The closest thing I think you might be able to find would be to issue/buy a swap on a CMBS pool (non-agency) that contains exposure to your city, perhaps a swap on a B-piece or something.
Not sure if they are still offered (or were ever really that available), but their have been attempts to create futures and other derivatives based on Case-Shiller home price indices, that is probably the closest to anything that ever came to market. But I don't think they really ever became popular due to lack of interest and liquidity.
Another question, is this something people in RE would be interested in?
It was attempted by many after the 08 GFC, but the insurance offered became too costly to ever make sense so pretty much every attempt failed.
If you could hedge the prices of real estate, then might you just be talking about a risky bond? Owning real estate provides diversification, an inflation hedge, current income, and capital appreciation. With a hedge, it would only provide current income and diversification, so it would be like owning a bond, but you are still at the bottom of the capital stack.
It might be interesting to have a liquid tail risk instrument to neutralize a real estate portfolio in case of a downturn.
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