Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Can you hedge housing risk?
Old 04-22-2010, 11:44 AM   #1
Recycles dryer sheets
Join Date: Feb 2009
Location: Canada
Posts: 81
Can you hedge housing risk?

A friend and I have been talking about renting vs owning and which is "riskier". On the renting side you have, effectively, price risk (rents could go up, maybe due to real estate appreciation). On the owning side you have asset risk (in the short term your home could drop in value, require a significant repair, etc).

We came to the agreement that owning is usually riskier in the short term, and renting is usually riskier in the long term. Quite often both balance out in the end.

My thoughts then turned to, ok, you choose one or the other. Say you decided to rent. How do you effectively hedge the price increase risk? Again, by price risk I'm referring to rents going up due to significant real estate appreciation in your area. My thoughts are that you could invest in REITs, but I'm not sure how much you would need to allocate to them to hedge.

On the other hand, my thoughts on hedging asset risk (mainly, falling prices) would be to short REITs. Does that make sense?

schmidtjas is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-22-2010, 12:15 PM   #2
Thinks s/he gets paid by the post
MasterBlaster's Avatar
Join Date: Jun 2005
Posts: 4,359
The NY Times...

Is It Better to Buy or Rent? - Interactive Graphic -

MasterBlaster is offline   Reply With Quote
Old 04-22-2010, 12:19 PM   #3
Thinks s/he gets paid by the post
SecondCor521's Avatar
Join Date: Jun 2006
Location: Boise
Posts: 2,672
Some less fancy ideas:

Rent hedging -- sign a long term lease.

Own hedging -- take out as big a mortgage as you can. If prices fall, walk away. If prices go up, profit. Ethics left as an exercise for the reader.

"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 04-22-2010, 04:31 PM   #4
Recycles dryer sheets
Join Date: Sep 2006
Posts: 80
Chicago Mercantile Exchange has futures contracts on home resale values. The contracts are based on the Standard & Poor’s Case-Shiller Metro Area House Price indexes, which track price changes of existing homes in 10 major metro markets.
AzDreamer is offline   Reply With Quote
Old 04-22-2010, 04:58 PM   #5
samclem's Avatar
Join Date: May 2004
Posts: 11,912
It's not what you asked, but more fundamentally you'd need to ask if the risk is one worth hedging (since buying "insurance" always adds costs). For example, if you own the house, there's no price risk unless you need to sell. Yes, your net worth might decline, but it's not a realized loss unless you sell the house. If you rent, the price risk will occur every time you renew the lease.
Regarding hedging using REITs, etc--real estate price changes vary a lot by region. If you specifically need to hedge against a price drop in your area, I guess you'd need to find some local bundle of similar RE and short it. It wouldn't be inexpensive.
samclem is online now   Reply With Quote
Old 04-22-2010, 10:12 PM   #6
Moderator Emeritus
Nords's Avatar
Join Date: Dec 2002
Location: Oahu
Posts: 26,636
Originally Posted by schmidtjas View Post
On the other hand, my thoughts on hedging asset risk (mainly, falling prices) would be to short REITs. Does that make sense?
A major conundrum with this supremely rational analysis is that housing is a supremely emotional issue. Pretty hard to persist with the rational analysis part in the face of the emotional part.

The book written on, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Old 04-22-2010, 10:42 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 17,828
Another key point is that REITs hold primarily commercial real-estate, not homes. And they really are different animals and don't appreciate/depreciate in lock step at all.


Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off

Similar Threads
Thread Thread Starter Forum Replies Last Post
The US as hedge fund calmloki FIRE and Money 1 03-05-2007 09:52 AM
Hedge Funds....... FinanceDude FIRE and Money 14 12-06-2006 08:21 PM
Hedge Fund Collapse.......... FinanceDude Young Dreamers 7 09-27-2006 12:14 PM
Hedge Fund Collapses NinjaPigeon FIRE and Money 14 09-21-2006 10:26 AM
Diversification a Hedge? nwsteve FIRE and Money 2 05-10-2006 10:06 AM


All times are GMT -6. The time now is 09:22 AM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.