get out now?
June 29, 2010 10:33 AM Subscribe
If a depression with high deflation is coming (Krugman), and a massive amount of real estate will come on the market as boomers age, retire, downsize, die, shouldn't I sell my house? Isn't selling now basically like shorting the whole US economy?
Yes if 1) Deflation happens 2) Prices fall significantly from currently depressed levels.
1 is a GIGANTIC bet.
posted by An algorithmic dog at 10:53 AM on June 29, 2010 [1 favorite]
1 is a GIGANTIC bet.
posted by An algorithmic dog at 10:53 AM on June 29, 2010 [1 favorite]
Selling your house now with the anticipation of picking up cheaper real estate in the future is shorting the housing market for sure and in a derivative way the economy. If you think your house's price will drop by more than the rental cost and the associated costs such as moving and also factoring in the tax implications of being able to deduct mortgage interest then go for it.
I would find a REIT to short or some sort of listed derivative or ETF to affect a short rather than selling, but that is just me.
posted by JohnnyGunn at 10:54 AM on June 29, 2010
I would find a REIT to short or some sort of listed derivative or ETF to affect a short rather than selling, but that is just me.
posted by JohnnyGunn at 10:54 AM on June 29, 2010
If you believe that he is right, yes — selling your house and then sitting on the cash would put you in a good position if the economy goes through a period of strong deflation.
I'm not sure that I would say that it is "shorting the whole US economy," but it is certainly taking what is in effect a short position against the residential real estate market, and that tends to track the economy fairly closely. (For suitable definitions of "fairly closely" — there are people who make their living on the spread between the two who might disagree.)
Personally I am not going to sell my house and I am skeptical that the government will allow substantial price deflation, particularly in residential RE. I think that they will start running the printing presses balls-out and pull all sorts of other cheap-money shenanigans in order to prop up values (in dollar terms, if not purchasing power) before they let that happen. It might be that houses do decline to a fraction of their value in terms of purchasing power / salary, but remain exactly where they are in terms of dollar value, in order to create the appearance to the naive that nothing is wrong. The net result in this scenario, if you sold your house and sat on greenbacks, is that you would be just as hurt and you would also be out a place to live. You might do better if you moved immediately into export-oriented equities or commodities or some very strong currency, but then you'd just be exposing yourself to additional risk.
So, the direct answer to your question is 'yes,' but it would be a major bet.
posted by Kadin2048 at 11:01 AM on June 29, 2010
I'm not sure that I would say that it is "shorting the whole US economy," but it is certainly taking what is in effect a short position against the residential real estate market, and that tends to track the economy fairly closely. (For suitable definitions of "fairly closely" — there are people who make their living on the spread between the two who might disagree.)
Personally I am not going to sell my house and I am skeptical that the government will allow substantial price deflation, particularly in residential RE. I think that they will start running the printing presses balls-out and pull all sorts of other cheap-money shenanigans in order to prop up values (in dollar terms, if not purchasing power) before they let that happen. It might be that houses do decline to a fraction of their value in terms of purchasing power / salary, but remain exactly where they are in terms of dollar value, in order to create the appearance to the naive that nothing is wrong. The net result in this scenario, if you sold your house and sat on greenbacks, is that you would be just as hurt and you would also be out a place to live. You might do better if you moved immediately into export-oriented equities or commodities or some very strong currency, but then you'd just be exposing yourself to additional risk.
So, the direct answer to your question is 'yes,' but it would be a major bet.
posted by Kadin2048 at 11:01 AM on June 29, 2010
Also the cleanest way to do something like you intend would be via a sale/leaseback arrangement with a bank or other buyer. That would free up your equity in the house while allowing you to continue living there as a renter. This is common in commercial real estate but I've never heard of it in residential (in the US), although I'm sure anything's possible with the right lawyers.
Not sure if you could find a bank that would do it, but maybe there are REITs or other investment groups (who are going long on real estate in anticipation of inflation) who would effectively cover your 'short'.
I still think it's crazy but it could be done.
posted by Kadin2048 at 11:08 AM on June 29, 2010
Not sure if you could find a bank that would do it, but maybe there are REITs or other investment groups (who are going long on real estate in anticipation of inflation) who would effectively cover your 'short'.
I still think it's crazy but it could be done.
posted by Kadin2048 at 11:08 AM on June 29, 2010
I'm not sure that I would say that it is "shorting the whole US economy," but it is certainly taking what is in effect a short position against the residential real estate market, and that tends to track the economy fairly closely.
I don't think it's really like a short position on the housing market or economy because if housing prices go down or the economy does poorly you don't make any money. If I short Google at $460 per share and it drops to $400 per share, I can cash out at that point with $60 per share in profit. If it instead goes up to $560, I could cash out with a loss of $100 per share. If I already own Google and sell it, I'm not getting into that kind inverse investment, my value is just not tied to Google's price directly at all anymore, it's tied to whatever asset I keep it in (which might be US dollars). If you sell your house at $300k and prices drop 30%, you're not actually making $90k by doing that, you're just not losing $90k that you would have lost if you had kept your money in that asset.
If you actually want to short the US economy via the stock market, you can put the money into a short index ETF like this. If you do that and are right, you will make money in proportion to how much traditional investors lose. Personally I don't actually recommend this strategy, because it's very unlikely that you or Krugman are good enough at overall market predictions to time the market. For evidence that most experts do not know how to make broad market predictions, check Guru Grades. Investing long on the overall market doesn't take any skill because over time the market tends to go up more than it goes down, whereas if you go short you must have some correct knowledge that gives you an edge over everyone else on the other side of your bet.
posted by burnmp3s at 11:28 AM on June 29, 2010 [2 favorites]
I don't think it's really like a short position on the housing market or economy because if housing prices go down or the economy does poorly you don't make any money. If I short Google at $460 per share and it drops to $400 per share, I can cash out at that point with $60 per share in profit. If it instead goes up to $560, I could cash out with a loss of $100 per share. If I already own Google and sell it, I'm not getting into that kind inverse investment, my value is just not tied to Google's price directly at all anymore, it's tied to whatever asset I keep it in (which might be US dollars). If you sell your house at $300k and prices drop 30%, you're not actually making $90k by doing that, you're just not losing $90k that you would have lost if you had kept your money in that asset.
If you actually want to short the US economy via the stock market, you can put the money into a short index ETF like this. If you do that and are right, you will make money in proportion to how much traditional investors lose. Personally I don't actually recommend this strategy, because it's very unlikely that you or Krugman are good enough at overall market predictions to time the market. For evidence that most experts do not know how to make broad market predictions, check Guru Grades. Investing long on the overall market doesn't take any skill because over time the market tends to go up more than it goes down, whereas if you go short you must have some correct knowledge that gives you an edge over everyone else on the other side of your bet.
posted by burnmp3s at 11:28 AM on June 29, 2010 [2 favorites]
When deflation swept into Japan in the 90s, housing prices dropped dramatically, and many homeowners lost money--especially if they were underwater on the note for their home, or overextended on their mortgage.
Then, a funny thing happened. After several years of declines, a floor kicked in. Housing prices even climbed somewhat in the aughts--deflation be damned. They're now stable, for the most part.
Even though US real estate is being hit hard, and will likely be hit harder as deflation worsens, severe declines--say, beyond 40% or so--will be protected by a floor, IMO. For one thing, scarcity of land will always prop up prices in urban areas. Manhattan squeezes in a lot of real estate into a small island, and the squeeze grows tighter every year.
For another, houses are made out of stuff, and stuff costs money. The prices of drywall and fixtures fluctuate, but these manufactured products will always cost a certain amount. Add that to the cost of labor, which isn't cheap. Add that to the cost of worker's comp, which goes up. What you get is a price for a house that represents the amount of stuff and labor that went into building it. This will always be relatively costly, because houses, unlike clothes and iPads, can't be outsourced to Chinese companies and Chinese workers to make on the cheap.
Houses, apart from prefab and manufactured ones, are custom-designed productsassembled built on site by semi-skilled and skilled labor. They have a book value that creates a floor protecting against ridiculously steep declines. A McMansion bought for 1.5 million, if its book value is 500K, probably won't go below that number (except during a severe and unprecedented depression).
posted by Gordion Knott at 12:22 PM on June 29, 2010
Then, a funny thing happened. After several years of declines, a floor kicked in. Housing prices even climbed somewhat in the aughts--deflation be damned. They're now stable, for the most part.
Even though US real estate is being hit hard, and will likely be hit harder as deflation worsens, severe declines--say, beyond 40% or so--will be protected by a floor, IMO. For one thing, scarcity of land will always prop up prices in urban areas. Manhattan squeezes in a lot of real estate into a small island, and the squeeze grows tighter every year.
For another, houses are made out of stuff, and stuff costs money. The prices of drywall and fixtures fluctuate, but these manufactured products will always cost a certain amount. Add that to the cost of labor, which isn't cheap. Add that to the cost of worker's comp, which goes up. What you get is a price for a house that represents the amount of stuff and labor that went into building it. This will always be relatively costly, because houses, unlike clothes and iPads, can't be outsourced to Chinese companies and Chinese workers to make on the cheap.
Houses, apart from prefab and manufactured ones, are custom-designed products
posted by Gordion Knott at 12:22 PM on June 29, 2010
Gordion is likely right, but really... a $1.5 million house selling for $500,000 would be a catastrophic event for all involved (except the buyer, perhaps!). The idea of a price floor being that low is hardly a comforting thought. Besides, the actual material cost of most "affordable" American houses is very, very low.
posted by speedgraphic at 1:58 PM on June 29, 2010
posted by speedgraphic at 1:58 PM on June 29, 2010
burnmp3s: You're correct in saying that it's not a true short; maybe it would be better just to say that it's a bearish position on real estate.
Unfortunately there are two ways that people use the word "short": there is the technical, correct sense, where you sell some asset that you have borrowed or otherwise don't actually own, in the hopes that the price will decrease and you'll be able to cover the position and make a profit. However, there is a more popular usage, where people just mean "take a position that will allow me to profit from a decline in value of x" where x is whatever they're "shorting." Thus people talk about shorting the dollar by buying Euros or all-ex-US stock indices, even though this technically isn't a short — you're just going long Euros, or long on a whole bunch of stocks which doesn't include any from the US. Depending on how it's done it could have the same or a similar net effect though, so I'm not generally of a mind to argue the point.
I don't think it's really like a short position on the housing market or economy because if housing prices go down [...] you don't make any money.
This isn't quite true though. If he were to sell his house and turn it into dollars, and then the economy were to enter a period of deflation that caused property values and other commodities to decrease relative to dollars, he wouldn't make money in the sense of having more dollars (except what he'd make in interest) but he'd be richer in purchasing-power / real wealth terms than if he had stayed in the house. Not only would he be able to repurchase the house for less than he had sold it, the dollars in the bank would be worth more (in real terms) than they were when he acquired them in exchange for the house. So there would be profit there.
I just think it's a risky and inadvisable move, to gamble with one's house. So in general we're in agreement, the difference is just what you would call a move like that, and how you would calculate its profitability.
posted by Kadin2048 at 2:04 PM on June 29, 2010
Unfortunately there are two ways that people use the word "short": there is the technical, correct sense, where you sell some asset that you have borrowed or otherwise don't actually own, in the hopes that the price will decrease and you'll be able to cover the position and make a profit. However, there is a more popular usage, where people just mean "take a position that will allow me to profit from a decline in value of x" where x is whatever they're "shorting." Thus people talk about shorting the dollar by buying Euros or all-ex-US stock indices, even though this technically isn't a short — you're just going long Euros, or long on a whole bunch of stocks which doesn't include any from the US. Depending on how it's done it could have the same or a similar net effect though, so I'm not generally of a mind to argue the point.
I don't think it's really like a short position on the housing market or economy because if housing prices go down [...] you don't make any money.
This isn't quite true though. If he were to sell his house and turn it into dollars, and then the economy were to enter a period of deflation that caused property values and other commodities to decrease relative to dollars, he wouldn't make money in the sense of having more dollars (except what he'd make in interest) but he'd be richer in purchasing-power / real wealth terms than if he had stayed in the house. Not only would he be able to repurchase the house for less than he had sold it, the dollars in the bank would be worth more (in real terms) than they were when he acquired them in exchange for the house. So there would be profit there.
I just think it's a risky and inadvisable move, to gamble with one's house. So in general we're in agreement, the difference is just what you would call a move like that, and how you would calculate its profitability.
posted by Kadin2048 at 2:04 PM on June 29, 2010
Don't forget to price-in that housing is already down 25-50%, depending. Are you willing to bet that it will continue to go down from there? I'd be willing to bet that it will stay flat for a while, but not significantly down.
As someone else said, there will be a floor. There is always a price that's so low the seller just won't (or can't) accept it.
If you own the house outright (or close to it) and there isn't any reason to sell, I would hang onto it. Effectively free housing is a valuable thing, ESPECIALLY in a funky economy.
(I'm almost sure a depression can't happen with high inflation, unless the Fed seriously devalues the dollar. Depressions are usually deflationary. In a depression, there just isn't enough money flying around to inflate anything. Stagflation is also probably not going to be an issue, as the Boomers leave the workforce, unemployment will go down again. The Boomers are a powerful cohort. Their leaving the nest and entering the workforce in the 70's probably caused the stagflation then. As they retire, other weird things will happen. Probably a healthcare system collapse and high taxes, but not (economic) depression. The country is too diverse now for that to happen naturally.
But what I *DO* expect is an extended period of low growth and low interest rates. Maybe not as bad as the Japanese lost decade, but close to it. Life will be a lot more like it was in the postwar era. You didn't just graduate college, get married, buy a house, outfit it with the latest in furniture and gadetry, buy a new car and have a kid, all in the span of 18 months like so many people were able to do. There will have to be more saving and living within means and those means not increasing by 8% every year.
If the Fed does a good job of titrating the rate, we will be fine. If you look at a curve of postwar economic growth, note how growth correlates with Greenspan's terms at the helm of the Fed. On a long term scale, he was very adept at shifting the gears of the Fed in reaction to changing economic conditions. His only failure was in not recognizing the over-heated nature of the housing and derivative markets and raising rates in response to it. I suspect he succumbed to political pressure from the White House. Had they raised rates in the 2003-ish area, the various collapses wouldn't have happened. However, that wasn't politically tenable because the rest of the economy was fairly recessionary.
Hopefully the lesson that will be learned is that when a bubble starts to form, you have to raise rates and pop it right away, and help the non-bubbling sectors out some other way.)
posted by gjc at 7:30 PM on June 29, 2010
As someone else said, there will be a floor. There is always a price that's so low the seller just won't (or can't) accept it.
If you own the house outright (or close to it) and there isn't any reason to sell, I would hang onto it. Effectively free housing is a valuable thing, ESPECIALLY in a funky economy.
(I'm almost sure a depression can't happen with high inflation, unless the Fed seriously devalues the dollar. Depressions are usually deflationary. In a depression, there just isn't enough money flying around to inflate anything. Stagflation is also probably not going to be an issue, as the Boomers leave the workforce, unemployment will go down again. The Boomers are a powerful cohort. Their leaving the nest and entering the workforce in the 70's probably caused the stagflation then. As they retire, other weird things will happen. Probably a healthcare system collapse and high taxes, but not (economic) depression. The country is too diverse now for that to happen naturally.
But what I *DO* expect is an extended period of low growth and low interest rates. Maybe not as bad as the Japanese lost decade, but close to it. Life will be a lot more like it was in the postwar era. You didn't just graduate college, get married, buy a house, outfit it with the latest in furniture and gadetry, buy a new car and have a kid, all in the span of 18 months like so many people were able to do. There will have to be more saving and living within means and those means not increasing by 8% every year.
If the Fed does a good job of titrating the rate, we will be fine. If you look at a curve of postwar economic growth, note how growth correlates with Greenspan's terms at the helm of the Fed. On a long term scale, he was very adept at shifting the gears of the Fed in reaction to changing economic conditions. His only failure was in not recognizing the over-heated nature of the housing and derivative markets and raising rates in response to it. I suspect he succumbed to political pressure from the White House. Had they raised rates in the 2003-ish area, the various collapses wouldn't have happened. However, that wasn't politically tenable because the rest of the economy was fairly recessionary.
Hopefully the lesson that will be learned is that when a bubble starts to form, you have to raise rates and pop it right away, and help the non-bubbling sectors out some other way.)
posted by gjc at 7:30 PM on June 29, 2010
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1.) aging in place-far away from health care services and such-like rural areas
2.)long commute times are gas gets more expensive and/or electric cars become more common with limited rage and don't have the density to support mass transit
3.)not really fun places to live (i am thing high desert and/or swamp) due to climate
the best thing to do is not treat your house as a investment. Buy what you can afford that suits your need and realize that owning your own home has benefits beyond money like
you control your home (it can't be sold to someone else, you get to make it like you want it)
a sense of permanence and community-where your treasures are is where your heart is
a sense of pride-you take care of stuff that is yours
None of us know what is coming, personally i think the world will be looking at declining population soon (maybe next generation) and noone knows what that will mean.
posted by bartonlong at 10:53 AM on June 29, 2010