Short Housing

rs7 · Jul 26, 2002

Originally posted by chisel

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I think the true "shorting" method is to rent. The way I think of it is that each month's rent is like paying the dividend on a short stock.

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I am not so sure about this....here is why. If I sell my house, fine. If I am wrong and the market continues to get stronger, well then I miss out on additional profits. But if I then rent, I am doubling my bet. I am now really short, because as time goes by,.I am not only losing possible appreciation on the house I sold, but I am eventually going to have to buy at a higher price down the line. So I lose both ways.
If I just hold, I think eventually I will not be sorry, because even if my house goes down in value, it will eventually recover.
The quandry seems to be that I am in the kind of home that is least likely to get hit by a break in the market. I am not in a high end home or in a low priced home. I am in the safe middle. The more I think about it, the more I think I should just hang on. Also, I am in an area that has no real economic vulnerability due to any industry. Still, I would love to know of a way to "short against the box" so to speak, if there is such a RE strategy. My house has been appreciating almost as fast as my stocks went down

DaqTrader · Jul 26, 2002

Originally posted by Aaron

It sounds like you've already done the math, Dustin. How do you figure a mortgage is better than paying cash?

Here's the way I figure it... 15 year fixed mortgage, no points is currently quoted at about 5.5%. Vanguard's Long Term Tax Exempt Fund is currently yielding 4.15%. You'd be unwise to borrow at 5.5% to earn 4.15% -- better to pay off your mortgage, or not take one out to begin with.

Sure, you might be able to get an (after tax) return better than 5.5%, but you'll have to take on some risk to get it, and then you risk doing <i>worse</i> than 5.5% also.

anytime u can borrow at 5.5% take it.....if rates go up then you will be happy u did.....eventually the money in the bank will earn you more than the cost of the loan....

rs7 · Jul 26, 2002

Originally posted by Aaron

.Here's the way I figure it... 15 year fixed mortgage, no points is currently quoted at about 5.5%. Vanguard's Long Term Tax Exempt Fund is currently yielding 4.15%. You'd be unwise to borrow at 5.5% to earn 4.15% -- better to pay off your mortgage, or not take one out to begin with.

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What about the fact that the mortgage interest is deductable? Doesn't that make the real returns on these numbers completely different?

Aaron · Jul 26, 2002

Originally posted by rs7

What about the fact that the mortgage interest is deductable? Doesn't that make the real returns on these numbers completely different?

Good point. I tried to take taxes into account by comparing mortgage rates to a muni bond fund which is tax free. But with mortgage interest deductible, the net rate isn't 5.5%, it is maybe (1-28%) x 5.5% = 3.96%. So now it looks like borrowing at 3.96% to keep your cash available for trading/investing <i>is</i> the better choice.

Thanks, rs7 and Dustin.

Steve72 · Jul 26, 2002

Originally posted by rs7

What about the fact that the mortgage interest is deductable? Doesn't that make the real returns on these numbers completely different?

No because we all know that all traders lose money so the deduction will have no benefit as there will be no income to deduct it from. Stick with Aaron's original advice.

rs7 · Jul 26, 2002

Originally posted by Steve72

No because we all know that all traders lose money so the deduction will have no benefit as there will be no income to deduct it from. Stick with Aaron's original advice.

Sorry to hear that it is that way for you. But the truth is, you can't speak for the rest of us.

Trading has treated me quite well for a lot of years.

And if you feel that way, why do you even bothering coming on this site?

Traden4Alpha · Jul 27, 2002

It seems that no one has figured out how to actually short their house. Selling your house and renting is really only a shift from a long position to a cash position. With renting, your personal net worth does not increase as RE prices drop. In a true short position, your wealth would actually increase as RE prices drop. To actually short RE, you must somehow use cash to borrow RE, sell it at the current price, and re-buy it at some later low price.

The closest strategy that I can think of is to short an equity position that is tied RE. You would want an equity whose decline in value tracks the decline in value of local RE (e.g., a local home builder or building owner). So, sell your house (to go from long to cash) and then pour the proceeds into a margin account and short an RE-affiliated equity. It is risky, like any short position, because if RE prices rise you will have even less money with which to buy the even more-expensive houses.

-Traden4Alpha

chasinfla · Jul 27, 2002

selling someone an option to buy a piece of property is not unheard of.

rs7 · Jul 27, 2002

Originally posted by Traden4Alpha
It seems that no one has figured out how to actually short their house.
It is risky, like any short position, because if RE prices rise you will have even less money with which to buy the even more-expensive houses.

-Traden4Alpha

Yup, well said!

chasinfla · Jul 27, 2002

here's a snippet from <a href="http://www.elliottwave.com/features/marketwatch/default.htm">EWI</a>...

But, is the asset mania that drove stock indexes to preposterous heights finally dead? The August issue of EWFF offers an answer, and here's a hint: the latest data shows a "surging number of Americans getting licenses to sell real estate."

There's conflicting PR coming out about housing. Some says people are scared and dumping (and the stock charts bear that out), others, like the above, say it's still a mania.

Perhaps this is due to geographical differences and/or that smart money is dumping so that stock prices lead; people rushing out to get licenses is probably a roughly coincident indicator.