I visit a few agriculture/farming forums and I found an interesting question last week. The quote below is from a guy who is looking for a way to hedge land value against a commercial real estate market crash. The event he wants to hedge against is very unlikely but has happened in the past. It was the worst consequence of the farm crisis in the early 80’s. His grandpa probably had lots of neighbors that lost their farms because of a sharp quick equity drop that triggered the acceleration clause in their mortgages.
How would you use futures and options to hedge against a real estate crisis? You could buy out of the money puts on the SPX, but would it be correlated enough to do the job?
The full thread I’m referencing is here: https://newagtalk.com/forums/thread-view.asp?tid=1139290&DisplayType=nested&setCookie=1
“I’m considering a land purchase that is on the edge of town so developers have the appraisal pretty high. I can afford the payment easily with my current income but I’m concerned about a drop in real estate values. The current interest rates make a downward adjustment of land value a real possibility and could change that appraisal figure substantially. If the lands appraised value was to drop by 50% a lender would likely ask that the principal be paid down to get the balance below the new valuation. This would pull the brakes on my other ventures pretty hard and I don’t know if I could stomach it. Is there a way to hedge land value after a purchase? An insurance policy? Some financial market option I’m not aware of?”
How would you use futures and options to hedge against a real estate crisis? You could buy out of the money puts on the SPX, but would it be correlated enough to do the job?
The full thread I’m referencing is here: https://newagtalk.com/forums/thread-view.asp?tid=1139290&DisplayType=nested&setCookie=1
“I’m considering a land purchase that is on the edge of town so developers have the appraisal pretty high. I can afford the payment easily with my current income but I’m concerned about a drop in real estate values. The current interest rates make a downward adjustment of land value a real possibility and could change that appraisal figure substantially. If the lands appraised value was to drop by 50% a lender would likely ask that the principal be paid down to get the balance below the new valuation. This would pull the brakes on my other ventures pretty hard and I don’t know if I could stomach it. Is there a way to hedge land value after a purchase? An insurance policy? Some financial market option I’m not aware of?”
Someone just ask the bank and let us know