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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 o

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 14y 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 14y 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 14y 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 14y 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.
gfodor 14y 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.
- moocow01 14y 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.
  - gfodor 14y ago
    It probably wasn't clear but I thought it went without saying that the example I gave is a horrible idea in practice. As soon as you see the word "leverage" you should start getting scared. When I hear the word "mortgage" I hear "leverage" whereas most people hear "monthly payments where I own the house instead of renting it." It's bad news.
kevinpet 14y 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.
michaelochurch 14y 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 14y 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.
  - guelo 14y ago
    Agree. Especially in the south bay/peninsula, you have all the millionaire NIMBYs preventing the area from becoming a new dense metropolis. It doesn't seem possible for cities like SF and Manhattan to be built today.
  - devb 14y ago
    My city's aging infrastructure is having trouble withstanding the population boom that's come with recent high density building. Sewers, traffic, and public transit are all suffering from unchecked construction. Sometimes NIMBYs have good reasons to fight development.
- danielweber 14y ago
wtvanhest 14y 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 14y 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.

javajosh 14y 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 14y 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 14y 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 14y 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.

gfodor 14y 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.

moocow01 14y 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.
- gfodor 14y ago
  It probably wasn't clear but I thought it went without saying that the example I gave is a horrible idea in practice. As soon as you see the word "leverage" you should start getting scared. When I hear the word "mortgage" I hear "leverage" whereas most people hear "monthly payments where I own the house instead of renting it." It's bad news.

kevinpet 14y 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.

michaelochurch 14y 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 14y 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.
- guelo 14y ago
  Agree. Especially in the south bay/peninsula, you have all the millionaire NIMBYs preventing the area from becoming a new dense metropolis. It doesn't seem possible for cities like SF and Manhattan to be built today.
- devb 14y ago
  My city's aging infrastructure is having trouble withstanding the population boom that's come with recent high density building. Sewers, traffic, and public transit are all suffering from unchecked construction. Sometimes NIMBYs have good reasons to fight development.
danielweber 14y ago

wtvanhest 14y 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 14y 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.