bostonbubble.com

[homeequityguard]

Hi everybody. I am new to the board.
I think you have a wonderful community going on.

The reason why I'm here is because we share an interest. I'm commercializing an innovative new financial product that helps homeowners manage their exposure to property price declines.

The product is described at homeequityguard.com/how_it_works/

If possible, I would like some critique and comment and what we are doing.

Thank you,

Home Equity Guard

[balor123]

I proposed such a product in 2005. My coworkers laughed at me and said they would gladly take that deal. That being said, this company is getting a great deal. If home prices go up, then they get to keep the 3%. If they go down, then I'm guessing they'll just declare bankruptcy. Insurance without regulation is worthless.

[GenXer]

As with almost any insurance product with 'guarantees', the terms are almost always (except when the issuer made an honest mistake) better for the issuer, especially if this is a product that relies on many people buying it to offset the risk of payouts to claimants. Just like all types of annuity and life insurance products, there are always conditions under which you lose (or don't make) money. The best way to evaluate these products is to compare them to a simple CD or a bond, and to see what happens in all possible scenarios. It almost always turns out that in a small percentage of outcomes you can make money, but usually, these are quite rare, and you can usually catch the 'upside' in other ways rather than by using the product. For example, you can catch the upside of the housing market with REITs (that don't cost you anything, though REITs are volatile, however, not much more volatile than a leveraged S&P Case Schiller index). The downside (probably will correspond to a stock market downside) is mitigated better in CDs and bonds. The housing risk is mitigated not by buying an insurance type product, but rather by

1) Financing at most 50% (decreasing the leverage as much as possible)
2) Having your house represent a small fraction of your portfolio (the smaller the better, but not 100% or even 50%)
3) Having adequate cash reserves to cover the mortgage if needed, and and being able to have enough savings to not have to sell when you lose your job.

Follow the above, and you won't need to buy extra insurance. Pay yourself instead.

[balor123]

Annuities are useful in some situations - like to cover expenses past median life expectancy or due to their tax status - but in general I agree they are good at generating fees and even the second benefit is really money from Uncle Sam, not the product itself. You can also get insurance indirectly by hedging against the risk factors through options. However, these have become a lucrative business for banks, who may not pay out in time of need.

Speaking of leverage, why are you and I the only ones who recognize that home price to income is an important ratio? Everyone seems to be focused on monthly payment to monthly income. I've looked hard on Google and can't even find much on the topic. The first ratio is important, IMO, for two reasons. First, it prevents a home from becoming a significant portion of your portfolio, which is especially important since it isn't diversified. A bad storm or a T line in your backyard can cause huge swings in value. Second, it ensures that if you need to sell and move and prices have gone down there's a good chance you can come up with the savings. I stick by 3x income, which is actually considered aggressive in many parts of the country.

[admin]

[GenXer]

Good points. I want a formula that always works. In fact, to make the formula complete, I believe the 4th condition is to establish a price/earnings ratio. But this ratio only works in conjunction with having adequate resources/downpayment/emergency savings.

[balor123]

I suspect Americans for most of the past century were generally concerned about spending too much money on houses on an absolute basis. Likely the housing bubble combined with general unaffordability using these metrics and low interest have changed the way Americans shop. Unless these conditions change then I think it is likely that American housing will never voluntarily leave bubble conditions and significant risk will persist from housing.

[CL]

balor123 - I was born outside of US so don't have the historical perspective, but just curious, when is the last time Boston area has price to income ratio of 3x?

[balor123]

I wrote suspect because I'm not all that old so it may not be true. I haven't looked at figures but I expect that the 3x ratio was respected in Boston in the 70s, when interest rates were high and before the rapid growth of the 80s. Anyone confirm? I would bet, though, that the ratio was close to that even before interest rates were high though.

[john p]

I think in the early 1990s's in that big Recession where people lost their jobs houses were selling pretty cheap and they stayed flat for like almost a decade just prior to the Bubble.

http://www.deptofnumbers.com/affordability/massachusetts/boston/

http://www.ritholtz.com/blog/2009/02/us-existing-house-price-median-family-income/

Notice, late 1990's.


http://www.boston.com/business/globe/articles/2007/06/11/home_costs_stay_beyond_reach_of_many/

[homeequityguard]

[homeequityguard]

[GenXer]

[admin]

[homeequityguard]