Author Topic: Insuring against housing bubble  (Read 3032 times)

morninglightmountain

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Insuring against housing bubble
« on: August 14, 2017, 07:04:15 AM »
I'm thinking of buying a home in a hcol area, and am concerned about a housing bubble. I've heard almost equal advice that you can't time markets to this is a huge bubble.  Because of my high savings rate (even with the home purchase), I can throw a lot into my mortgage beyond the minimum, so it would take a crash like 2008 for me to be truly underwater, in which case I'd rent out after moving. However, since part of my FIRE plan involves paying cash for a house in a lcol area, this will be more difficult.

Any ideas for ways to manage/hedge? Or is avoidance the only way?


Since I can FIRE in 5-7 years (7 realistically), I could just rent for the remainder of the time. This would normally be the default option, but my partner and I are feeling the itch to own our own place that we can fix up/personalize.

Drifterrider

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Re: Insuring against housing bubble
« Reply #1 on: August 14, 2017, 07:15:52 AM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.

1.  Are you buying a house in which to live for a long time? 
2.  "Underwater"  a term frequently misused.  If you aren't planning to sell, it doesn't matter.  The value of property is always what someone else will give you for it.  If the market value of your property drops it could benefit you with the property tax department. 

 

rothwem

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Re: Insuring against housing bubble
« Reply #2 on: August 14, 2017, 08:06:09 AM »
The "hedge" is renting. 

morninglightmountain

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Re: Insuring against housing bubble
« Reply #3 on: August 14, 2017, 08:21:08 AM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.

1.  Are you buying a house in which to live for a long time? 
2.  "Underwater"  a term frequently misused.  If you aren't planning to sell, it doesn't matter.  The value of property is always what someone else will give you for it.  If the market value of your property drops it could benefit you with the property tax department.

Well, we would like to move to a lower cost of living area when we FIRE. So ideally, we'd sell in 5-10 years. I feel like renting is the right answer, but 5 years seems like a long time, so our enjoyment of owning our own place might be worth a short delay to FIRE if property values crash.

Capt j-rod

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Re: Insuring against housing bubble
« Reply #4 on: August 14, 2017, 08:22:08 AM »
Housing prices are a supply vs demand scenario. If it is a desirable HCOL as you describe then even if another bubble were to happen your exposure would probably be minimal. If the trend continues as I suspect it will, your rent will continue to increase. The biggest benefit to home ownership is to time capsule your expenses. The house payment remains the same as inflation takes off. I don't have a crystal ball and all predictions are pure speculation. I do feel that inflation will start to increase in the future. Dollar buys less, rent goes up, wages always lag behind inflation. For this reason and many more I try to keep my money invested. Otherwise it is actually going down by sitting in cash. I don't believe in chasing the market, fearing bubbles, blah blah. I always make sure that what I purchase has a purpose and will provide for itself.

GuitarStv

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Re: Insuring against housing bubble
« Reply #5 on: August 14, 2017, 08:23:09 AM »
Buy a house, pay it off, then live in it for 20+ years.  It's a pretty unusual scenario where this will lose you much money.  Don't buy a house if you're planning on moving in the next ten years, if you aren't happy with the location, and if the home isn't going to suit your future needs (one bedroom house but you hope to have three kids).

I'm a red panda

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Re: Insuring against housing bubble
« Reply #6 on: August 14, 2017, 09:07:36 AM »
  If the market value of your property drops it could benefit you with the property tax department.

Somehow this never seems to work out.  If the city really will lower the assessment (which they rarely will), they always seem to raise the tax rate.

Enough

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Re: Insuring against housing bubble
« Reply #7 on: August 14, 2017, 03:22:05 PM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.

1.  Are you buying a house in which to live for a long time? 
2.  "Underwater"  a term frequently misused.  If you aren't planning to sell, it doesn't matter.  The value of property is always what someone else will give you for it.  If the market value of your property drops it could benefit you with the property tax department.

Well, we would like to move to a lower cost of living area when we FIRE. So ideally, we'd sell in 5-10 years. I feel like renting is the right answer, but 5 years seems like a long time, so our enjoyment of owning our own place might be worth a short delay to FIRE if property values crash.

In LCOL areas where rent is proportionally high (1.5%-3%) compared to housing prices, it can make sense to buy even if you are living there for as little as 3-5 years.  In a HCOL area it likely only makes sense if you are sure you will live there 10-30+ years (you do the math for you - just be sure to take into account all of the home ownership costs... closing costs, realtor fees, opportunity costs associated with the down payment, homeowner maintenance, taxes, insurance etc... its a lot more than just the mortgage).


Mr. Green

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Re: Insuring against housing bubble
« Reply #8 on: August 14, 2017, 10:06:38 PM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.
Be careful when assuming a short recovery period. We're in the DC area and homes still haven't completely recovered from the last bubble. Been 11 years now.

morninglightmountain

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Re: Insuring against housing bubble
« Reply #9 on: August 15, 2017, 08:25:27 AM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.
Be careful when assuming a short recovery period. We're in the DC area and homes still haven't completely recovered from the last bubble. Been 11 years now.

Where in the DC area? I'm looking at places in Oakton, Fairfax, and even Springfield and it looks like prices shot past previous highs a couple of years ago.  It actually makes me nervous.

Cwadda

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Re: Insuring against housing bubble
« Reply #10 on: August 15, 2017, 09:08:58 AM »
Question for you OP:

 what happens if you predict the so called housing bubble to pop, avoid buying a house for another 5 years, and it doesn't pop, but appreciates further instead?

morninglightmountain

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Re: Insuring against housing bubble
« Reply #11 on: August 15, 2017, 10:22:23 AM »
Question for you OP:

 what happens if you predict the so called housing bubble to pop, avoid buying a house for another 5 years, and it doesn't pop, but appreciates further instead?

As long as I invest in ETFs and rental properties in lower COl areas,  I should be ok.

Cwadda

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Re: Insuring against housing bubble
« Reply #12 on: August 15, 2017, 11:24:11 AM »
Question for you OP:

 what happens if you predict the so called housing bubble to pop, avoid buying a house for another 5 years, and it doesn't pop, but appreciates further instead?

As long as I invest in ETFs and rental properties in lower COl areas,  I should be ok.

Following this train of thought, is it possible to buy a primary residence with multiple exit strategies i.e. rent it out long-term if the market takes a dive?

ketchup

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Re: Insuring against housing bubble
« Reply #13 on: August 15, 2017, 11:33:10 AM »
  If the market value of your property drops it could benefit you with the property tax department.

Somehow this never seems to work out.  If the city really will lower the assessment (which they rarely will), they always seem to raise the tax rate.
My county just did the opposite (/same) for my house.  They can brag about lowering "property tax rates" but then my assessment goes up and my actual property tax ends up higher than last year. <_<

Vegasgirl

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Re: Insuring against housing bubble
« Reply #14 on: August 24, 2017, 04:58:36 AM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.
Be careful when assuming a short recovery period. We're in the DC area and homes still haven't completely recovered from the last bubble. Been 11 years now.

Where in the DC area? I'm looking at places in Oakton, Fairfax, and even Springfield and it looks like prices shot past previous highs a couple of years ago.  It actually makes me nervous.

I'm also in the DC metro area - Mr. Green is correct in that prices haven't yet reached the level they were back in 2005, but IMO they were ridiculously high then.  I feel like prices are pretty stable (at least in MD).  Northern VA has always been a hotter market than MD, IMO.

Capt j-rod

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Re: Insuring against housing bubble
« Reply #15 on: August 24, 2017, 12:41:12 PM »
What if you bought a nice duplex? Fix it up and rent one half out. If you want to move then rent both sides. Tenants make the majority of your payments and there are tax incentives. When you live on site then damage is much less likely.
Just a thought....

clarkfan1979

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Re: Insuring against housing bubble
« Reply #16 on: August 25, 2017, 10:49:26 AM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.

1.  Are you buying a house in which to live for a long time? 
2.  "Underwater"  a term frequently misused.  If you aren't planning to sell, it doesn't matter.  The value of property is always what someone else will give you for it.  If the market value of your property drops it could benefit you with the property tax department.

+1

Zero Degrees

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Re: Insuring against housing bubble
« Reply #17 on: August 25, 2017, 03:57:59 PM »
A housing "bubble" means nothing unless you are planning to sell in a short period after buying.

1.  Are you buying a house in which to live for a long time? 
2.  "Underwater"  a term frequently misused.  If you aren't planning to sell, it doesn't matter.  The value of property is always what someone else will give you for it.  If the market value of your property drops it could benefit you with the property tax department.

I just wanted to add that I bought right before the housing market crashed. My taxes have done nothing but go up since I bought 10 years ago.  They are just going up faster now that the market has stabilized.  At one point, my house lost a $100k in value.  My taxes never "went down" during this time.

This is also why I will never buy again. People claim you own something "outright" after it's paid for. There is still a cost to own a home outright. You have to pay taxes, maintenance, repairs, insurance, and possibly HOA. Sure you are paying someone else's bill when you rent, but you don't have to rent a high end apartment or home either.  My point being, there is still housing costs regardless if you own or rent.

bacchi

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Re: Insuring against housing bubble
« Reply #18 on: August 25, 2017, 04:25:34 PM »
Go long (buy) a house and short the appropriate Case-Schiller housing future. Now you're market neutral with some leak due to rolling over the contract.

http://www.cmegroup.com/trading/real-estate/residential/SandP-case-shiller-home-price-index.html