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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 ca
by 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 agoI 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 agoIt 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.
- moocow01 14y agoAgree - I wanted to point out the problem with the seemingly rosy situation of using leverage to "get ahead." There are many people that think they are being financially smart by buying as much a house as the bank will give them with the assumption they will bank the difference while seemingly never paying attention to where their paycheck is evaporating each month.
- jaggederest 14y agoLeverage isn't scary. Look at the site you're on - the entire startup culture is based on leverage. Leverage is a way to increase both the risk and reward. It only increases volatility, not absolute ratios.
- gfodor 14y agoVolatility, when it comes to large numbers with dollar signs next to them, is scary. Startup culture is not leverage in the sense I am using here. Startup founders are generally leveraged on the upside but not on the down. They own calls. If you don't believe me consider that sometimes the powerball jackpot every few years has a positive expected return. Unless you are going to live forever, you need to be mindful of volatility.
- brc 14y ago>Startup founders are generally leveraged on the upside but not on the down. I don't agree with this at all. This assumes zero costs on the part of the founder when it comes to a startup. There are significant costs, including extra work, low or no salary, and opportunity costs. I agree that the potential upside is much more like a call than a long position, but all calls have a premium cost, and have a much higher risk of being out the premium cost with no reward.
- gfodor 14y agoWhere did I say there was no cost? My point is exactly what you just said.
- justincormack 14y agoThe 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.
- gfodor 14y agoSeems like a semantic argument. Clearly the wealth did not fall from the sky.
- justincormack 14y agoAsset price changes are not wealth, they are inflation plus redistribution.
- nandemo 14y agoIt 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.
- SideburnsOfDoom 14y ago> elsewhere but not renting it. I live in London. if I somehow manage to buy an apartment with spare bedrooms, damn right I'm renting it out!
- hippich 14y agoI guess it is not so norm in USA. I've seen friends renting together apartment, but not owner living in one room and renting out another room.
- SideburnsOfDoom 14y agoSurely the USA varies a lot. New York may be a close approximation. What's that like?
- rquantz 14y agoYes, owners definitely rent out rooms in New York apartments.
- 14y ago
- vidarh 14y agoI 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.
- klochner 14y agoBut in practice people buy houses with heavy leverage (often only 20% down), meaning that price appreciations have the potential to multiply their capital and more than make up for the price gap widening.
- eli_gottlieb 14y agoLets 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.