bostonbubble.com

[Guest]

My wife and I are looking to buy a house in the next few months. We're not looking to make money through our home purchase, we're just ready to leave the apartment life and get a place of our own. There seems to be a pretty strong consensus (at least on this board) that housing prices are still on their way down, but however much prices may fall after we buy, it will cost less in the long run than the divorce my wife will get if we don't get a house next year.
If all the doom-and-gloom on this board is right, is there anything I can do to keep myself from paying $400k for a house that ends up being worth $200K? Maybe there isn't anything that will prevent that, but perhaps I could just ask for advice for someone who is out there looking to buy right now.
Thanks!

[admin]

Here are a few ideas off the top of my head - this is just brainstorming on my part, so if any of this sounds useful, please research it further:

• Hedge using S&P/Case-Shiller futures
  
• Private mortgage insurance
  
• Find a motivated seller
  

I think that the S&P/Case-Shiller futures for Boston could let you lock in a future price. The most recent index value for Boston was 169.34 and the most recent value for the November 2012 futures contract was 152.80, implying a 9.77% decline before inflation. I think that if you bought a house and sold enough contracts at the same time to equal the value of the house, you could lock in the 9.77% nominal decline. If prices fall more than that, then you would make money on the contracts. If prices fell less than that or rose, then your house would be worth that much more. The loss on one side would balance out the gain on the other, and you would have a total loss of 9.77%. The potential hiccups that I see here are 1) the low volume on the contracts may make it difficult to buy multiple contracts without affecting the price, 2) you can't lock in prices further than 5 years in the future, and 3) there is a small opportunity cost for the performance bond that you must post when selling these contracts.

Private mortgage insurance can protect against falling home values. This can be required if you have multiple mortgages (because of a small down payment), but perhaps you can buy it even if you aren't required.

In any case, perhaps you can find a motivated seller. Maybe print out a graph of where the futures market predicts prices will be in a few years and use it to try to negotiate a similar discount now.

Good luck.

- admin

[jayrandom]

Thanks for the response.

I think your suggestion to convince sellers the market is weak may be useful, but it seems that many buyers aren't really getting that point. I've seen a few of open houses for properties bought in '06 with absolutely nothing done that are listing for 10-20% more than the purchase price. I think there is starting to be some realization that the market is overvalued, but it is slow.

As for buying futures contracts, I think that is a bit out of my league, financially. The point you make about low volume is especially worrisome. The other concern is that if prices were to go up significantly, I would only have illiquid assets to offset the futures contract (namely, my house) and while it would be heartwarming to know my value had increased, I would still have to find real money to pay the contracts. I have a feeling that I'll just take my lumps on any future loss I may encounter in selling the house as the price of living in a single family house of my own and having a much happier wife.