You Are Naturally Short Housing

http://thezikomoletter.com/2012/12/10/you-are-naturally-short-housing/

by soundsop • 14 years ago

307 202 14 years ago

mmphosis• 14 years ago

Depending where you live there are alternative shelters. The alternatives are not for everyone, and they are usually not "easy", but there are advantages and disadvantages to not owning (a house) and to not renting.

lsc8• 14 years ago

example? I mean, assuming one wants to live within society and not as an "outlaw" wanderer, I'm having a difficult time thinking of how you can avoid buying or paying for shelter.

mappu• 14 years ago

You could live with your parents, or couchsurf with an understanding friend / partner. Richard Stallman famously lived out of his MIT office for a long period of time.

Of course, these lifestyles all have costs, just not necessarily financial ones.

btilly2• 14 years ago

"Alternative" does not necessarily mean "free".

For example buy an RV. Live in it.

etherael2• 14 years ago

I travel the world country hopping every month or so and stay almost exclusively in places sourced off airbnb or wikitravel. Works fine, I don't know if I'd qualify as an outlaw wanderer? Perhaps not.

Or you could buy an RV and travel whatever land mass you're stuck in, or you could buy a yacht and travel the seas, or the options are fairly limitless. Buying a house and settling down is just the path most frequently taken, not the only one by any stretch of the imagination.

jessepollak• 14 years ago

Question, what if you own a permanent shelter and then buy/rent/lease another (or multiple) shelters as an investment. Would you still consider that shorting the housing market?

ukoki• 14 years ago

This would make you 'long' in the housing market, but I fail to understand why people are so eager to buy individual properties as an investment. Individual properties are incredibly risky because the price is tied to so many local factors, what if the area goes bad? What if a bad tenant destroys it or doesn't pay rent for a few months? - for those who believe investing in property is a 'sure thing', why not simply invest in real-estate investment trusts, spreading the risk to thousands of properties around the country (or world), and getting a much less volatile return which is more representative of the 'true' housing market.

robryan2• 14 years ago

You might think you have local knowledge which allows you to purchase and charge a higher than average rent. Also you might be choosing a house that you want to live in down the track as an investment now.

You are correct though that this can carry added risk.

nicholas73• 14 years ago

The best and worst reason I can think of for why people are attracted to investing in properties is leverage. For the typical person it is the only asset class where banks will lend and allow you to leverage an order of magnitude above investment. You cannot do that in a REIT. However you are right it increases risk and also you put in a lot more work. If you can afford the risk and have time, then great. If not, there are other ways to make money, as you point out.

herge• 14 years ago

Taxes. The tax benefits often is worth the risk in most jurisdictions.

ww520• 14 years ago

The benefits of investing in individual properties are:

- Other people's money (leverage via loan)

- Tax write-offs (interest deduction, expense shelter, depreciation).

- Appreciation.

- Equity growth.

- Rental income.

The first two probably can't be obtained via REIT.

ef4• 14 years ago

It comes down to competition, information, and control.

When you go for maximum diversity in big markets (like a big REIT), you're competing against a big pool of smart money. There are going to be fewer pricing errors to exploit. You don't have more information than other players, and you don't have any particular control over the management of the investment.

If instead you are an expert in one small market, competing against a smaller pool of other players, you are going to find more pricing errors to exploit. And you are going to achieve much greater control over the investment, so if you happen to think you're an above-average manager (or chooser of managers), you can improve your returns above average.

Diversity isn't everything. It can actually hurt, if it means you're investing in many things you don't understand well, vs a few things you do.

dxbydt• 14 years ago

Wtf?! Yes you are short housing...then u buy one...prices go up... you sell the damn thing...at which point you become short again...but with that extra money you can cover your short and come out ahead in a different market. It isn't like gold in that the prices are fairly constant across markets. If my house in the bay area goes up 30% i sell that and relocate to illinois you can bet i will cover the short and come out ahead since home prices in illinois lag ca by a good 150-200k.

zecho2• 14 years ago

But there's a reason home prices lag, generally speaking. Pay also tends to lag. But honestly, the Bay Area is an outlier in the housing market. Imagine moving from Chicago to San Francisco...

elpool2• 14 years ago

That's true, but not many people are willing to completely relocate themselves to a different part of the country just for a good deal on real estate.

moocow015• 14 years ago

"If my house in the bay area goes up 30% i sell that and relocate to illinois you can bet i will cover the short and come out ahead since home prices in illinois lag ca by a good 150-200k"

You need to factor in interest paid on your bay area loan to get the full picture. Just because your house value goes up by a certain margin does not come close to meaning you have profited by that much. This is especially important to understand in areas with large home prices in that the cost of holding the asset (interest) is very high especially early into the loan.

simonh• 14 years ago

Very true, but don't also forget to deduct the cost of renting liveable accommodation from your mortgage costs. Otherwise your comparing the cost of living in a house to the cost of living in a cardboard box.

pbreit• 14 years ago

Actually, you have profited much more. If you put 25% down and your home appreciates by 25% you have doubled your money (net of interest and other costs). Also, newsflash: interest rates are very low these days.

gfodor6• 14 years ago

As mentioned elsewhere in the thread, you are not short some dollar value but short some "survivalship house value" based upon your own subjective tolerance for what is a "minimally viable living situation."

If you live in the bay area, you may be short the "house value" equivalent of $500k, but living in Illinois you may be short the "house value" equivalent of $250k. Of course the location is part of the "minimally viable" part for certain people, but for others this is a less important part of "viability". Regardless, it's not a dollar value, it's "house living value", and anything beyond that part of the equity in the house you own (for most people: the majority of it) is speculation/investment into the real estate market.

robryan2• 14 years ago

What about if you get to 60, sell your house and use the money to rent for the rest of your life. In that case you might have higher short term costs as well but to you can stay in short term as you will likely not need a house for long enough to make long term more economical.

Also housing markets in different places don't move in unison so there is some room to trade markets and turn a profit.

Not sure any of this effects the point of the article though.

ksherlock• 14 years ago

And don't forget a reverse mortgage.

caf• 14 years ago

Yes - you are only naturally short the housing you will need for the rest of your life, but if you own a house then that represents housing for the rest of the asset's life.

If the life of the asset is expected to be significantly longer than your life, then you are indeed slightly long in housing.

pcwalton• 14 years ago

Similar reasoning applies to willing your house to your kids (or whoever else) -- that's potentially a lot of value you can transfer when you no longer have housing needs yourself.

tomasien• 14 years ago

This is true, you can't sell your house and then NOT have shelter. What older people can do is sell their house and then move into an apartment and gain financially from this transaction, assuming they don't live for many many more years.

However, if they do they "lose" on the transaction: and this proves the "covering a short" nature of the transaction.

Wonderful piece.

csallen• 14 years ago

I know next to nothing about trading. But it's become apparent to me that some of the core concepts/terms in trading (long, short, hedge, liquidity, futures, cover, etc) are very useful for modeling things in other walks of life. So, trading-savvy HNers: Are there any books, websites, or habits that you'd highly recommend to help a newbie become familiar with basic trading concepts?

dekayed• 14 years ago

I've been taking the Computational Investing course on Coursera. I knew next to nothing about trading and its definitely been helpful with the basics.

https://class.coursera.org/compinvesting1-2012-001/

ch00• 14 years ago

I have also been following this course and am extremely disappointed in its quality -- not just in poor production, but also in the coverage of course material. I would not recommend this as a primer on investing.

A__MJ• 14 years ago

Open an account on thinkOrSwim (etrade, whoever), fund it, trade with small amounts of money and research everything as you go.

Arbitrarily, SLV, which is an ETF that tracks silver futures. If you want to play with fire (and learn a lot of cool stuff), trade options (that's what I used to do)

Websites: SeekingAlpha (side note: financial articles, SA included, are sophisticated-sounding babble put out by someone that has to meet their quota, not well-thought-out logical explanations by people in-the-know)

Make a list of terminology and learn directly what it means to your trading. Pretty much any trading term that has general meaning and isn't arcane and quant-y is googleable. I recall Khan Academy also having very useful videos explaining a lot of terminology (Salman Khan used to be a trader)

For example, in SLV: Liquidity: How easy (read: cheap) it is to open and close a position. If the spread on an option is $33.00 (sell) and $33.33 (buy), you lose 1% (most people say $0.33 - I prefer to look at the percentages) just by getting in and out of a position regardless of your trade (I'm ignoring commissions), and assuming the trade reliably goes through instantly. The higher the cost (time, risk of nonfulfillment, money) of opening and closing a position, the more illiquid the position is.

In the context of houses, the time and effort and money put into maintenance and time and uncertainty involved in buying/selling, etc make them extremely illiquid investments. If you own AAPL stock and it crashes, you can hit a button and sell it. If you own a house and the housing market collapses, good luck!

If I were to invest the cost of a house in some high-volume stock with a tight bid-ask ratio and sell it two years later for the same price by hitting a button on my phone, my losses are just the bid-ask difference and I was never really at much risk of being unable to sell it instantly (during market hours at least). It's a very liquid position.

That's just one example, but there are plenty out there. Jump in feet first, google all the things, and don't wager stupid amounts of money.

001sky6• 14 years ago

Something like "Options as a Strategic Investment" is probably the shallow end of the big pool of modern trading. Highly recommended. Others might disagree, and say its over-ambitious (without some technical chops).

http://www.amazon.com/Options-Strategic-Investment-Lawrence-...

bradleyjg3• 14 years ago

Pick up a few books like Liar's Poker, When Genius Failed, and Barbarians at the Gate. That'll give you an engaging intro. Then you can start reading sites like FT, seekingalpha, Bloomberg, etc.

A few pieces of advice: under no circumstances do you want to get caught in the weeds of technical analysis, similarly stay away from the gold bugs, and finally learning is good, but don't jump in unless you are prepared to lose your shirt.

javert2• 14 years ago

under no circumstances do you want to get caught in the weeds of technical analysis

Why is that? (I ask as someone who is genuinely curious and has no prejudice, not as someone who disagrees with you.)

similarly stay away from the gold bugs

What do you mean? Do you mean, "Don't buy gold," or do you mean something more than that? And, why? (Similar caveat to before, modulo that it looks obvious to me that gold is a much safer store of value than almost anything else and probably even a good investment.)

phil• 14 years ago

You won't learn finance specifics from those books, but they're all great recommendations.

In particular, everyone in this community should read When Genius Failed as a cautionary tale. It had a big impact on my world view. Here's a case where the best and brightest formed an accurate, contrarian hypothesis and executed on it perfectly, but were then blinded by their own cleverness and succumbed to hubris (the partners were leveraging their personal wealth to increase their stakes in their fund) and lost it all.

brc7• 14 years ago

The best books are the 'Interview' series by Jack Schwager. These date right back to the 1980s until a very recent release last year. They are just interview format books with successful traders from a very wide variety of markets and styles.

The key takeaways from the books are 'your investment style must fit your personality' and 'anything is tradeable if you have an edge'.

The books will give you a very good grounding in trading concepts as well as open your eyes as to the diversity of people that succeed in the field.

It will also help you dismiss 'advice' like 'technical trading is useless' or 'fundamental trading is hopeless', because you will be able to detect the advice-givers bias, and realise that, like anything, it's different strokes for different folks. What matters (in trading, in life) is that you identify an edge you hold, and apply that edge with discipline. And if you don't know what your edge is, you don't have one.

Patient0• 14 years ago

"A random walk down Wall Street" by Burton Malkiel is the classic layman's introduction to investing.

I would also recommend "Fooled by Randomness" for the introduction of the essential idea that most returns are not "normally distributed" - most profit and loss happens via wild swings, and most successful people are lucky rather than good.

Finally, for a more technical but very entertaining read: "Trading and Exhanges" by Larry Harris. eg in this book I learnt about "the Brazilian straddle" options position: a naked short option position hedged with a one way ticket to Brazil. (in case the bet goes against you) ;)

bjacokes• 14 years ago

Like with any other language, I've found that frequent interaction with financial terms improves your literacy and helps you make better connections between ideas. For instance, a few years ago when Southwest Airlines seemed to have much lower prices than everyone else, I read that they had bought futures contracts back when oil prices were low. Right there you have a company that's 'naturally short' oil, who 'hedged' against rising prices by buying 'futures', etc. A couple of good sources for financial news are the APM Marketplace podcast and Felix Salmon's blog on Reuters, and you can look up terms on Wikipedia when needed.

Keep in mind that a bunch of the commonly recommended finance books are either a bit pop-finance (Liar's Poker) or somewhat outdated (Intelligent Investor), which is OK if your goal is to be entertained or well-versed, respectively. Most authors have a thesis, and if you were to only devote time to one book and it happened to be something like Fooled by Randomness, you'd find yourself with a very skewed view of things. That's why I'd suggest current news if you're only interested in financial terms as they relate to your job.

And finally, like with any other jargon, realize that while it's useful to know and can help formulate ideas, a lot of people overuse it. Not saying this article does it, but I've seen finance people go "short" undesirable menu items at a restaurant. Don't let the gratuitousness make you think these terms are more important than they are :)

alexchamberlain• 14 years ago

Stocks, Bonds, Options, Futures.

Simple, yet effective.

kevinpet2• 14 years ago

Trading and Exchanges: Market Microstructure for Practitioners. Larry Harris. http://www.amazon.com/Trading-Exchanges-Market-Microstructur...

This does a really good job of explaining how having people fulfilling different roles viz trader, dealer, investor results in being able to buy and sell whatever you want whenever you want. I wish I could send a copy to everyone who thinks flipping second-hand goods on Craigslist is arbitrage.

chnabeelahmed• 14 years ago

Last year I was in a kindof similar situation, this stock, investment, trading always intrigued me.Started with random reads i.e. articles at marketplace, FT and looking for terminologies at investopedia. The first formal read was: Trading for dummies (sounds bit noobish) but it proved a top move, with zero distractions and aqcuired the basic fundamental and technical analysis concepts plus lot more. After it, definitley go for some detail read Intelligent Investor, Liar's Poker .

yummyfajitas• 14 years ago

Wilmott's book if you aren't that great at math: http://www.amazon.com/gp/product/0470319585/ref=as_li_ss_tl?...

Neftci's book if you are: http://www.amazon.com/gp/product/0125153929/ref=as_li_ss_tl?...

(Both require some calculus.)

dmmalam• 14 years ago

These are the notes from Computational Finance course at Imperial College. They are particularly useful if your a CS major.

https://www.dropbox.com/s/4jib6zc0q3su870/381%20Computationa...

lotharbot• 14 years ago

Broadly speaking: you are not "investing" in any market if you only own the amount you intend to use or consume for yourself. You are only "investing" if you own (or have contracts on) more than you intend to consume.

For example, having a few bananas in your fruit bowl does not give you a position in the banana market. Owning thousands of bananas you intend to resell, or shorting a banana company, gives you a position in that market.

Likewise with housing. Owning enough housing to live in (at whatever standard of living you intend) is a market-neutral position, so you should not be particularly excited by price changes in the market. If you own too little housing, you're "short" and price raises are a negative, and if you own excess housing (extra properties, or a larger-than-desired property) you're "long" and price raises are a positive.

javajosh• 14 years ago

The more interesting game is the one in which the housing market is not assumed to be homogenous. If you can somehow anticipate a positive change in a local housing area, buy a house there and then sell it after the change occurs, moving to a cheaper, less desirable house, you can indeed make a profit. However, this requires two things: a) that you correctly anticipate the change and b) that you don't want the change for yourself. The nice thing about this play is that even if the change never occurs you still have a house. (There are many examples of positive change - e.g. the new railroad going through Rock Ridge in Blazing Saddles.)

Datonomics• 14 years ago

You can do this. This may seem idiotically simple, but you can easily see how very possible this is. Track the market you are interested in purchasing a home. Watch the number of homes sold vs the number of homes coming up for sale. (simple supply and demand) If you see more homes coming on than being sold you are going into a buyer's market (price dropping) If the opposite, then seller's market (price goes up). By doing this, you can stay ahead of the market. Note: you must seasonally adjust, which is very easy to by getting a history of the market you are tracking.

Proof:

Look up historical solds vs "on the market." (ask a realtor for this info, keep calling you will eventually find one who will give it to you) Then look at zillow or any other site that tracks historical home prices. You will see the supply leads price, usually by months/years not days or weeks.

How can this the be possible? 1. Realtors, on average, are wildly misinformed and much more interested in making a sale than doing market research.

2. It does not pay for large investors to buy individual properties so you do not have savvy investors correcting market errors. (this does not apply to commercial property)

munger• 14 years ago

A couple issues with this though. Realtor commissions (possible to avoid if you have enough knowledge), and/or loan fees, closing costs, title insurance, etc. Also in the US, capital gains taxes if you don't live in it for at least 2 years. So the appreciation or difference in price would have to be significantly large.

mmcconnell1618• 14 years ago

The housing market does not have the same liquidity that other markets have and this creates opportunities where a spread exists between actual and perceived value. There is always someone who needs to sell now and always someone who is willing to wait as long as it takes to get a specific price.

Also keep in mind that on the "housing ladder" it's always easier for someone with a big property to down size than it is for someone to move up. Mid to low end housing will have a completely different market dynamic than 2 million dollar estates.

gfodor6• 14 years ago

This is an excellent point which deflates most of this article's premise. The "shelter short" you hold by being a living breathing person is really just what can be considered livable shelter. For most people, I'd imagine they live in houses that are well beyond what they could reasonably survive in, so that portion of the equity position of the house they live in is strictly "long".

This probably is better served by an example. Lets say you buy a $2m home as a single person. And lets also say you could just as comfortably live in a $250k home. If house prices go up and your $2m home suddenly becomes a $2.25m home, you can sell it and get a "free" livable home with the 250k profit. (Technically that house would be selling for 277k at that point so you get to buy a "livable home" for $27k, but that's besides the point.) You basically are now market neutral, whereas before you were long. You will have a livable home for the rest of your life, as long as your requirements of what is considered livable do not change.

Where does the "free livable home" come from? $1.75M of your original home was "long houses". Or, another way to look at it is you were leveraging beyond your $250k "survivalship position" in housing by 8x, and then scaled back the leverage to 1x when you bought your second home. This $1.75M was speculation (or investment, depending on how you look at it :)) in the housing market. The additional speculative risk you took via the leverage resulted in the market rewarding you with a place to live.

moocow015• 14 years ago

I made the same argument lower in the thread but with omission of an instant price bump the instant you get the home or buying purely with cash, the idea of getting a very expensive home with the strategy of banking the difference in appreciation is typically a very bad idea. Banks will love to tell you its a great idea and that is because a million dollar loan held for 5 years at 5% interest will cost you 250k in interest to hold the asset effectively wiping out the 250k profit if that happens.

The only true reward is going to the bankers for taking the risk of loaning a million bucks.

justincormack2• 14 years ago

The market does not "reward" you for taking "risk" in that sense. You got lucky. Portfolio theory does suggest some risk premium on undiversifiable assets but not that.

nandemo• 14 years ago

It doesn't deflate the article's premise.

There are 2 ways we can see your example. Living in 400sq m house when you only need 40sq m could be:

1) equivalent to living in a 40sq m apartment and owning a separate ~300 sq m house elsewhere but not renting it. Well, of course in this case you're losing money as long as you don't rent it. Even if the real estate prices go up and you finally sell the house years later, you need also to subtract the money you threw away by not renting it, or say, compare to the situation you didn't buy the extra house and instead invested the money on Treasuries.

2) Going back to one 400sq m house. Now of course one could claim one's using and enjoying the extra-space beyond the 40sq m. Later, after the housing price goes up, you sell it and buy a 40sq m apartment; but this means you're cutting down on your monthly consumption of housing. So this doesn't deflate the article's premise either.

vidarh• 14 years ago

I think one takeaway from the article is that people misunderstand what market movements are good for them when they own a home exactly because they see it as a long investment, while they are actually often still short some proportion of their dream home...

If you want to one day trade down, like in your example, then increasing prices is good.

If you want, instead, to maximize the size of the the house you live in, within a similarly prized area, you should instead hope for a steadily deflating house market - the faster the better, down to a level where you have only just enough equity left to put down a deposit on a larger house.

People often see their house as an investment that will give them a lot of money, while forgetting that they likely dream of trading up, and forgetting that if their house appreciates, the price gap from their house to the their dream house is increasing too.

For most people other than the old, we tend to be perpetually in the situation where we would like to trade up. And so we should cheer on price drops, to a certain extent, rather than cheer on rises in equity.

eli_gottlieb4• 14 years ago

Lets say you buy a $2m home as a single person. And lets also say you could just as comfortably live in a $250k home.

Ah, you Silicon Valley folks and the bubble you live in.

Hint: most Americans and, indeed, most citizens of Earth, could never afford a $2m house, or often even a $250k house.

kevinpet2• 14 years ago

One does not invest in markets. One invests in assets, preferably productive assets.

If I drink milk, I can either continue to buy it at the store, or buy a cow. By investing in a milk-producing asset, I've made myself market neutral to milk prices. I'm pretty sure that a single cow would actually be more milk than I would consume, so I run into the inconvenience of the asset not trading in odd lots.

Housing has the nice feature that it can be conveniently bought and sold in units that match my consumption (unlike half-cows). I think the analogy of being short housing is apt as well, because housing is something I am pretty much certain to consume.

michaelochurch3• 14 years ago

I am glad a few people get this. High housing prices are an unmitigated disaster. They are sometimes a symptom of something good (a robust job market) but often not even that.

For that, high housing prices have more to do with supply disruptions and destruction than with demand, because housing prices are extremely inelastic. A 1% drop in supply can push rents or prices up by 20% or more. (Ask New York.) Mouth-breathing bourgeois fuckheads clap their fat hands together when prices rise and say, "People really want to live here!" No, fuckface. What actually happened is that all those stupid NIMBY regulations made it impossible for anyone to fucking build, and so there's a supply crunch, making prices and rents three times as high as they should be.

This also explains why New York real estate prices went up after 9/11 (except for Lower Manhattan, which dipped for a few months and then went up) and will probably do so after Sandy. It was speculation driven by the possibility of future supply destruction, which would be bad for the few thousand people affected but increase overall price levels.

sjg007• 14 years ago

I agree. Nimbys and current owners prevent the building of higher density and modern housing. You would hope that the Federal government would step in because new construction would create jobs. Also in the Bay area, you could add lots of higher density housing near the Caltrain and gain that way.

danielweber• 14 years ago

Rising housing prices are very popular politically, though.

I tend to agree with your analysis, but you must recognize the nature of your fight.

wtvanhest• 14 years ago

I generally agree with your point that you are not investing if you are not taking a long position in an asset above its needed weight.

When the typical person buys a home they do so with a lot of leverage. 20% down gives you 80% debt which is now 4x leverage.

The way I see it, you have two potential choices when you are considering an home purchase with debt like a normal American. 1) Go short 100% the value of a house. 2) Go long 5x 100% the value of the house.

Neither option puts you at market neutral.

andylei• 14 years ago

you don't have to be "investing" in an asset to have exposure to that asset.

you have short exposure to an asset iff: asset value up => your utility down. the opposite is true of long exposure.

by owning and using a car, you have a short exposure on gasoline. gasoline prices up => you are worse off. you're not "investing" in gasoline, but you still have an exposure.

you have a "natural" short exposure to housing because if you do not buy a house and housing prices increase, you will be worse off. if you rent, housing price increases will drive rents up, and if you are going to buy a house, the amount you have to pay for your house will increase.

by buying a house, you become housing price neutral. if you already have a house, then an increase in housing prices doesn't make you any better off - even though your house is worth more, so are other houses.

hayksaakian• 14 years ago

It'd be great if my parents understood this concept. They always seem excited to sell their house when prices go up, and plan on buying a new one in a couple years after buying the first.

kjackson20123• 14 years ago

My parents bought their house 25 years ago 250k and sold it for 1.5m. Now they are renting a 2 br apt for 1500/month. Their housing cost will be roughly 25k/yr and they are millionaires. The idea that the article talks about how you can't be long the housing market is just dumb. His analogy doesn't work and to say that you can't benefit from house prices going up is dumb.

kelnos3• 14 years ago

If your parents took out a loan when they bought the original house, you're likely neglecting the cost of interest. If not, that's fine too.

So they "made" $1.25MM at the sale of their house. That's a taxable capital gain. The rules for that can be complicated, but let's just say 15% to keep it simple. So that drops the gain about $188k down to $1.06MM.

Let's say they live for the rest of their lives in the 2BR apartment (I have no idea how old your parents are, but lets just say that's another 30 years). So you say your parents' housing costs will be $25k per year. Let's say that goes up 2% per year. In a rent-controlled area it might be a little lower than that, and otherwise it might be a bit higher. Over those 30 years, your parents' housing costs will be $970k. So now your $1.06MM is down to about $90k.

So, effectively, your parents have "made" $90k on their $250k home. That's 36%, or about 1.5% per year. Not great, but better than most savings accounts. Er, wait. Inflation. Wolfram Alpha says that 250k 1987 dollars is worth just over $500k today. So under this model, your parents just "lost" $410k.

Not to mention that your parents are now living in a 2BR apartment instead of a presumably-larger house. And maybe that's fine: you can say that your parents' innate housing short got smaller because they've decided that they don't need such a large house anymore, and something smaller and not free-standing will be fine for them. But that's basically like saying you bought a case of beer, then decided you didn't need that much, sold it, and bought a half-case of beer to replace it. Sure, you now have a half case of beer worth of money that you didn't have before, but you can't say you "made money" selling the beer.

Now, I'm sure I left out some costs (housing upkeep, property taxes, etc.), and didn't get the capital gains tax quite right, but I hope you see my point here. It may make financial sense to sell your house and downsize, but this in no way means that a home purchase was an "investment".

blrgeek• 14 years ago

Presumably, they'd 'invest' that $1M @ 2.5% to get 25K/yr, nicely paying off their rent, and keeping the capital in place.

And if they invest it at 2.5% + inflation, they'd never run out their capital either.

So your conclusion is incorrect.

The way I see it, land (+ house) provides inherent value - ala equity in a stock, and unlike gold or cash. So buying a house, is an investment, since it'll presumably last beyond your lifetime, and continue to deliver value.

anatari3• 14 years ago

Your analysis is incorrect because having to spend 25k + inflation 30 years from now is not the same as spending it today. To calculate properly, future expenditures need to be discounted according to return minus inflation compounded over the duration. So unless you're claiming that you can't safely get a return above inflation, his parents will come out ahead.

sokoloff• 14 years ago

In all of your complexity, you seem to fail to account for the "control case" of GP's parents renting the whole time. You can't reasonably "charge" the $970K for the next 30 years of rent against their "profit" from their ownership experience.

What you've essentially proven is that, "In order to live in their original house for 25 years plus an additional 30 years of renting, they will have out-of-pocket housing expenses." That finding is air-tight, but also unenlightening.

What would it have cost them to rent for all those 55 years?

kjackson20123• 14 years ago

You can use whatever math to rationalize your theoretical position on the subject. However, my parents who were a single income middle class family earning no more than 60,000 at their peak now has 1.5m in the bank.

The idea they "lost" 410,000 when they have $ 1.5m cold hard cash is mind boggling in your own self delusion.

benjaminwootton2• 14 years ago

A lot of people think their house is their pension and they will downsize, but few people do.

A lot of old people simply don't want to leave their home, and of those that do, most people will prefer to stay in the same area near lifelong friends and family. As area tends to be a bigger element of the price than the size of the house, it's difficult to be release that much capital after taxes, costs of moving.

Also note that your parents lived through a massive and unprecedented credit bubble. Just because this happened over the last generation does not mean it will continue to happen. Quite the opposite, we'll be unwinding the excesss of that generation over the next 10-20 years.

jameslin101• 14 years ago

If you are "naturally" short housing because you need it, can't you could make the same case for all hard commodities and stocks in companies that produce all your future consumption needs?

mbetter• 14 years ago

No.

brandall104• 14 years ago

"If house prices rise, the value of your house (the hedge) increases but so does the cost of shelter."

What about the ability to rent? As demand for purchasing housing goes up, demand for renting typically goes down (ie. either levels off or regresses). Sure over time both go up, but at a particular slice of time, usually on a cost of living basis one is advantageous over the other. And while you're renting at a cheaper cost than it would be to essentially rent money (let's not kid ourselves, you don't own a house if you have a mortgage), you have liquidity to place in other investment vehicles.

Small observation... maybe there's something to it, maybe not, but it seems I'm 2/2 on calling when market swings happen here in downtown San Diego over the past 10 years. Take a look at the delta in rental prices in properties in various classes and compare verses actual selling prices. Just like a P/E for a company, if you can't at least turn a profit on owning a piece of property as a rental, it is likely overpriced. As much as people love to talk about various market factors much of this is emotionally driven.

For instance, last year I observed an entry level condo complex in a marginal area rent 1 beds in the $1800-1900 range. The latest comps for that building were $150k for like properties. About 5 blocks away 1 beds in a luxury high-rise were renting in the $2200-2300 area. Comps? High $300k. At the height of the market comps for the luxury high-rise were in the mid $500k area and the marginal property were in the upper $300k area. Back when that was happening, the luxury high-rise unit was renting just shy of $2k. The marginal unit? About $1400. I took another 4-5 other buildings in the area of varying quality and this trend was intact. To be fair this is a small, insular market and these swings are largely driven by speculation from the bubble-tastic situation many overheated markets found themselves in (ie. people owning and flipping multiple properties found the bottom of the market being rented cheaply).

drewcrawford3• 14 years ago

> As demand for purchasing housing goes up, demand for renting typically goes down (ie. either levels off or regresses)

While it's true that we had a rather large anomaly 2004-2009 (a.k.a. the housing bubble), and that there are tiny boom/bust cycles in which it is possible to get a little leverage to cover switching costs, prices and rents seem to be mostly linearly correlated [1]. This means that as prices go up, rent goes up.

In order for prices to be divorced from rents, you have to hypothesize some weird market externality, like a major recession, or crazy incentives for mortgages, city suddenly becomes a tourist destination, etc.

[1] http://static3.businessinsider.com/image/4fb9fad169beddbc290...

brandall104• 14 years ago

It would behoove you to read beyond the sentence you quoted.

"In order for prices to be divorced from rents, you have to hypothesize some weird market externality,"

There are always externalities at play with an asset, and many times they are irrational. Sometimes people just want a place to put their money because a particular asset class appears to be more performant at a given time than the alternatives.

[1] Isn't applicable as this is a regional phenomena. Looking at this at a national or global level absorbs localized hysteris.

josephlord6• 14 years ago

The variable delta between rent and purchase price/mortgage cost doesn't break the premise that purchasing a house is a hedge against future requirements. You might do better renting but you don't have the future right to occupy that house at any cost. Rents might go up more than your investments and leave you needing to look elsewhere but if you have bought it you have a secure tenancy (subject to mortgage conditions).

I think you are very right about a large delta being a signal of an unsustainable market though. Steve Keen (http://www.debtdeflation.com/blogs/) describes investment in assets where the profit won't cover the interest as 'Ponzi' investment as you are hoping to pay it off from rising asset prices and points out that these are unsustainable in the long term, someone is going to get caught out. He thinks that loans should be capped to a multiple of rental value which should reduce the tendency to drive up prices by purchasers competing to take on the most leverage and mean that competing purchasers compete on who can commit the most equity.

brandall104• 14 years ago

"The variable delta between rent and purchase price/mortgage cost doesn't break the premise that purchasing a house is a hedge against future requirements."

But it does break the premise "but so does the cost of shelter." There is an advantage to sell while it's a seller's market and rent, while doing the opposite while it's a buyer's market. That's leverage that breaks this premise.

"You might do better renting but you don't have the future right to occupy that house at any cost."

This thinking is one of the key reasons why it's possible to systematically make money off of real estate. It's pervasive crowd-think, at least in the more impacted markets. It seems sound and logical, but it's fear based and irrational. There is clearly an upwards trend in real estate, yes that is true. But there are peaks and valleys along that mean.

"Steve Keen (http://www.debtdeflation.com/blogs/) describes investment in assets where the profit won't cover the interest as 'Ponzi' investment as you are hoping to pay it off from rising asset prices and points out that these are unsustainable in the long term, someone is going to get caught out. "

Yes, that's speculative action at work - as I mentioned in my original post with actual examples toward the end with my theory of how to detect the switchover. It's fun to talk about and how to solve it but it doesn't change that it actually occurs. The recent housing bubble exacerbated it but it is a phenomena of active markets during boom/bust cycles.

ash• 14 years ago

Seems to be overloaded. I had better luck with (Coral) cached version: http://thezikomoletter.com.nyud.net/2012/12/10/you-are-natur...

bitteralmond• 14 years ago

Can someone please translate the trader jargon out of this article?

mdonahoe• 14 years ago

I cant figure it out either, but I think it just means that you will always need shelter, so prices going up is bad for you.

At first I took "shorting" literally, and thought it meant I borrowed a house, sold it, and now I need to buy it back at some point. It probably just means "in need of", with a bit of financial connotation?

"Define short"

7. low in amount; scanty: short rations.

9. below the standard in extent, quantity, duration, etc.: short measure.

10. having a scanty or insufficient amount of (often followed by `in or `on ): He was short in experience.

regularfry• 14 years ago

It's literally the last definition there: "having an insufficient amount of." "Shorting" refers to the process of getting to the position of having an insufficient amount, assuming you start neutral or long. He's saying you are "born short", not that you interact in any "shorting."

mdda2• 14 years ago

Because everyone needs to live somewhere, if they don't own a house, they are hurt if house prices (and 'therefore' rents) rise.

To avoid being affected by something external (like house price fluctuations), it makes sense to own a property (or invest in property-related stocks). But only enough to cover your needs.

If you buy a too-big house, or several houses, you'll be in the situation of hoping for house prices rises - meaning that you'll benefit if prices rise - beyond the additional cost that you'll face in the current property markets.

The surprising point of the article is that it is natural to assume that no property = no exposure. But that's not true in the case of housing.

CrankyPants• 14 years ago

I'd pay for you to do this in higher volume.

001sky6• 14 years ago

The surprising point of the article is that it is natural to assume that no property = no exposure. But that's not true in the case of housing.

-- suggests public policy should be to <decrease> housing prices. yest many government's seek to <increase> or "support" them. we should all ask why??

sethg2• 14 years ago

If X is some investment (gold, real estate, Apple Inc. stock, whatever), and I have structured my portfolio so that I would benefit from the price of X going down, then I am “short X”. If I would benefit from the price of X going up, then I am “long X”.

“You are naturally short housing.” = “If the price of housing goes down, you will be naturally be better off.”

benjaminwootton2• 14 years ago

I'm surprised we don't see more discussion of house prices on sites such as this. In my opinion it is THE issue affecting our generation.

Specifically for HN, the high cost of housing severely restricts entrepreneurship. If you are paying 50% of your income on a rent or mortgage, you are of course less likely to start a business, and the cost of doing that business in terms of employees salaries and commercial rents make it less viable.

Also consider that your suppliers, and their suppliers, and their suppliers ad infinitum, all have the same high costs ultimately derived from high housing costs for their employees.

This all adds up across the country and the whole economy is made less competitive and agile as a result. With lower housing costs there would certainly be less unemployment.

The sad thing is that the even intelligent people are duped into believing the myth that high house prices are good for them. Clearly lower prices mean more disposable income, which is usually a good thing? Clearly high house prices barely benefit anyone as we all need a house, and the next house you buy would likely have gone up by a greater price than the one you have now? And yet we persist - 'we MUST get on the housing ladder' and we blame those nasty banks because 'they aren't lending any more' when all they are doing is scaling back lending multiples from the absurd back to the ridiculous.

All that high house prices achieve is to keep young people into debt serfdom, keeping us on a treadmill servicing massive mortgages for the same bricks our parents bought for 20% of the price. We really could be out doing something much more worthwhile.

Edit - you may wish to read this to put the madness of this credit bubble into perspective: http://www.housepricecrash.co.uk/forum/index.php?showtopic=5...

jseliger3• 14 years ago

Word about this problem is trickling out, slowly—I like to cite Edward Glaeser's The Triumph of the City and Ryan Avent's The Gated City on the subject—but I think a lot of people simply don't understand supply and demand.

One time in Seattle I was driving home a friend, who was in law school, and she complained that there was too much construction in the city, and that construction made it less affordable. I said that more units make the city less affordable than it would be otherwise, and she said that they were tearing down "affordable" housing to put up housing for "rich people."

I tried to explain that, if given space that had 12 units now has 200, the overall affordability rises, but she totally didn't or wouldn't get that point. It was a bit like the scene where the Martian and man meet in The Martian Chronicles. Except that I'm right and she isn't. But until more people connect supply restrictions with cost, we won't get (much) improvement.

(Side note: I just read this: http://www.slate.com/blogs/moneybox/2012/12/10/brooklyn_is_c... on the subject.)

thisone2• 14 years ago

>I tried to explain that, if given space that had 12 units now has 200, the overall affordability rises, but she totally didn't or wouldn't get that point.

I don't know what your friend's reasoning was, however, I can see an argument on her side.

If the 12 units that were torn down were worth (and able to be sold for) 200k each and they were replaced by 200 units worth (and able to be sold for) 500k each, then that neighborhood is about to change character, and it probably won't continue to be affordable for the people who can't afford a 500k unit.

josephlord6• 14 years ago

Supply and demand isn't that simple especially in housing or other assets seen as investments. Rising prices in housing increases rather than decreases demand. People want to get on the ladder, banks throw money at people with no incomes and the world goes mad when house prices go up. It may be than supply can do a little to moderate the effects of the backwards demand curve but I don't think it can generally fix it.

Where there is a real building boom (Ireland/Dubai/Spain... 2004-2008, probably much of China now) the building industry can actually be a large part of the economy bringing in migrants (and housing demand) into the area temporarily increasing demand. Also the building tends to happen when prices are rising and people build and purchase speculatively based on the rising prices. So in the short term affordability falls due to the increased demand. In the slightly longer term prices start to fall and the building stops and therefore the demand falls further and no one will offer a mortgage to buy anything so affordability is still rubbish.

[Edit: typos. Added Spain to list of 2004-2008 boom areas and put a "probably" on China]

Spooky232• 14 years ago

If real estate development was a free market, and a true commodity, then I would agree with you. The problem is, it isn't either thing.

The tax rules associated with large construction projects, plus that fact that large-scale commercial real estate is a cartel in most US markets means that the actual impact in terms of units doesn't equate to the number of units built. That's one reason why you see economic behavior that doesn't make sense on the surface -- prime urban residental property left vacant or rented out as tenament housing and big commercial properties left vacant for years.

Generally speaking, today, new residential construction in urban areas is pushing affordability out to the periphery of the city, or the aging out ring of suburb outside of the city.

Another issue is that location matters, and we tend to stick to desirable places in a limited area. Few people want to uproot their kids from school every few years or move away from their families and social networks. So the fact that a 3 bedroom ranch in Minneapolis costs 60% less than a 1 bedroom apartment in Queens doesn't really matter.

I'd suggest you read the sections in Robert Caro's "The Power Broker" see how these kinds of shifts impacted millions of people in NYC during the 50s and 60s.

stephengillie• 14 years ago

Something to note is that Seattle's central neighborhoods were strongly in the grip of a condominium boom. Older houses and 12-unit apartments were being torn down to build fancy 200-unit condo buildings for more than double the previous rent.

clauretano• 14 years ago

For what it's worth, specific to what I've seen in Seattle, the vast majority of the higher density apartment buildings being constructed in Seattle today are replacing single family homes, parking lots, and quite often single floor commercial development with mixed-use.

I hear this "there's too much construction, they're building luxury apartments for AMZN/MSFT workers and pushing out the artists and baristas" argument all the time on Capitol Hill, but I've sat down and looked at the many dozens of buildings that have been build in the last couple years and the ones currently under construction, and only once was a cheap building torn down for construction of a luxury building. The specific location is the NW corner of E Pine and Bellevue, and the former building was abandoned after a fire.

Along Broadway E, several blocks of commercial real estate have been replaced with equivalent commercial square footage plus 5-6 stories of apartments on top. No units lost, only gained. In Denny Triangle, Amazon is ripping out a car dealership and some parking lots to build three blocks out with 500ft tall office towers, and apartment and condo towers are popping up in the area surrounding that already.

The story is similar in Lower Queen Anne and South Lake Union. Generally, no units are being lost to new construction, and neighborhoods are getting more dense and more walkable, all of which benefits people who don't want to depend on cars.

One of the most exciting housing developments in the city right now is the Apodment craze. These small dormitory-style apartments are built in very walkable areas of the city, and priced so that students, artists, and baristas can afford to live in them. They're generally built without any parking at all, which helps keep costs down. They exploit a loophole in the building code to allow this high density, and the typical NIMBY characters are quite upset. Funny, the same people who complain about luxury apartments putting bland software developers in their neighborhood abhor the thought of housing that the artists can actually afford being built.

eli_gottlieb4• 14 years ago

That doesn't take account of what quality and price-point the old and new units occupied. If the old units were older housing with fewer amenities at a lower price-point and the new units were luxury condos with in-building gymnasiums and doormen, then she was right and you were wrong. In that case, the construction was shifting the supply-versus-quality curve to more supply at higher quality and less supply at lower quality. Lower quality isn't always a bad thing, because it naturally implies a lower price for those comfortable with the no-frills approach.

netcan2• 14 years ago

One strange thing about the house prices is that people can opt out, especially in the US. You don't have to live in expensive places. You can live in perfectly nice places where house prices are 30%. One would have thought that the internet would have eased some pressure on the most desirable addresses, but the discrepancy seems to be getting sharper.

Another way of putting it is that if house prices are harming innovation, you would see more entrepreneurship in lower cost of living locations.

michaelochurch3• 14 years ago

Another way of putting it is that if house prices are harming innovation, you would see more entrepreneurship in lower cost of living locations.

Correlation != causation.

Right now, location still matters a great deal. People are just mobile enough to stratify in their 20s (ambitious people move to the star cities) but not enough to render location obsolete outright.

In the Bay Area and New York, you have a continuous/liquid job market. If you're a startup that needs to hire a Scala expert with knowledge of 3 specific NoSQL databases, and you need to hire that person in two weeks, you can find such a person in the Bay Area, for a price. In Minneapolis, there are a lot of talented people, sure, but there isn't the critical mass that allows you to have ridiculous AND-ing in your requirement query. The same goes in job searching. You might have to choose between your location and your speciality.

The appeal of the star cities is the continuous, liquid market. For build-to-flip startups that grow rapidly and reallocate huge amounts of money without doing much, the second-tier cities just aren't an option.

chiph• 14 years ago

While the internet does make location irrelevant for a lot of purposes, there is value in being in an area with lots of other technology people. Even Superman moved from Smallville to Metropolis. :)

jfoster• 14 years ago

Isn't banks lending part of the reason why prices are so high? If no one could get a loan, no one would be able to pay current prices for housing.

jtc3312• 14 years ago

It's not so much that no one would buy if they couldn't get a loan so much as it is that the availability of the loan causes prices to rise because demand goes up relative to supply.

don_draper• 14 years ago

All good points. But ask yourself, 'What's in the best interest of the wealthy and powerful, who get what they want?'. (They own a lot of real estate) Sorry if i'm too cynical.

polskibus• 14 years ago

I found the author's style engaging and simple enough for the broader audience. I'd like to see more of this, perhaps continuation of the thought and description of mortgage backed bonds and CDOs ?

thisone2• 14 years ago

maybe the PlanetMoney podcast? The episodes they did with This American Life about the mortgage crisis back in like 2008-2010 were brilliant (imo), and then they bought their own CDO toxic asset in 2010, I think, and reported on it.

http://www.npr.org/blogs/money/ http://www.thisamericanlife.org/radio-archives/episode/418/t...

zecho2• 14 years ago

Toxie (the given nickname for the toxic asset they purchased) was a long-running recurrence on Planet Money. Here is the archive: http://www.npr.org/templates/archives/archive.php?thingId=15...

roel_v2• 14 years ago

- Author fails to make the distinction between two aspect of owning a house: for shelter and as an investment. These are two, although related, distinct aspects.

- Author fails to acknowledge that the point of making money an a house ('using it as investment') hinges on not rising prices, but prices that rise faster than inflation / COL, and/or inflation being above the mortgage rate the house was financed with. So no you're not 'just covering a short position', you're covering a short position and going long at the same time, with the same vehicle. But this is of course where the analogy falls apart. I posit that his analogy is unhelpful in understanding the role of a house in personal wealth management.

nullc4• 14 years ago

I don't think there is any failure there:

- You are inherently short the hypothetical minimum shelter requirement home— this is your future housing obligation.

- You may also be long a highly correlated actual home asset.

Appreciation of the latter is not beneficial to you when it is matched by the former. This means, for example, that you should think carefully before obtaining a HELOC against "appreciation" because you can have paper appreciation while staying equal or actually becoming worse off relative to your future obligations.

stanfordkid• 14 years ago

what about renting vs. owning? Can't you arbitrage between the two. http://www.nytimes.com/2008/05/28/business/28leonhardt.html?...

josephlord6• 14 years ago

Absolutely. But you should realise that while you are renting you are 'short' on housing and you will either need to keep buying housing monthly (a.k.a. renting) for the rest of your life or buy a house later (hopefully cheaper or at least more affordable to you than you could now). There is nothing wrong with being short on the housing market you may have no alternative or you may have much better places to invest your assets or you may just think house prices will fall.

No option is risk free but the lowest risk approach is to match your lifetime needs to your assets so that you don't care what happens to house prices.

hans• 14 years ago

this can't be good, that hedge funds are currently buying up housing in a huge way, moving into rentals especially, going long housing, expect a rent grip like no other in the next 3-5yrs :

http://www.marketplace.org/topics/economy/hedge-funds-crowd-...

http://www.nytimes.com/2012/12/09/business/financiers-bet-on...

paulsutter• 14 years ago

This is an extremely long-winded way of saying that rising house prices are only good for owners who want to move to a smaller house.

The article misses that rising house prices can also be good for a person who intends to move to a place with cheaper housing.

Net net: rising prices good for near-term retirees and rental property investors, bad for almost everyone else.

You Are Naturally Short Housing

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