"Daytrading" Your House
- May 27, 2005
- admin
- Entrepreneur, Investing
YOU AND I HAPPEN TO SHARE A MUTUAL FRIEND.
No it’s not Bob Jones.
Nor is it Karen Smith.
It’s that person we both know who bought that second home ten years
ago for $250,000.
You know the one.
That self-proclaimed real-estate “mogul” who turned his
$250,000 into $1.1 million in a quick ten years.
The same one who now offers real estate advice at dinner parties to
other friends or ours who never ask for it.
Yea, that guy.
Well, for those among us tinted green with 2nd home real-estate
envy (I comfort myself with his stock-market envy), I have a
secret to share with you:
I might know a way for us simple folk to lock in the profit in
our primary home without even selling them.
That’s right!
No listings, no moving vans, no real estate agent’s.
Want to hear more?
Ok, Let me explain:
The people at the Chigaco Mercentile Exchange have reached an
agreement with Yale economist Robert J. Schiller’s firm Macro
Securities to list Housing Options.
Yes, the same Robert J. Schiller who wrote a book boldly predicted
the demise of the stock market in APRIL 2001, EXACTLY ONE MONTH
BEFORE IT STARTED.
The same Robert J. Schiller whose been quietly mentioned as a
possible FED governer.
Yes, Mr. Schiller is back.
But this time it’s not stock prices he’s thinks are overvalued,
it’s home prices.
And this time he doesn’t want the publishing, he wants the trading.
You see, Robert J. Schiller has created a derivative instrument,
similar to an option index fund, that will track home prices
in “certain” (read: overvalued) markets (New York, Chicago, L.A.
etc).
So, if you live in New York and you think home prices
are going to drop, you could buy an option akin to a stock “put”
option and make money when they indeed go down.
Or, if you happen to be like my real-estate mogul friend (whom we
affectionately call “The Ronald”) you could buy a derivative akin
to a stock “call” option and profit if home prices rise.
Margin trader meet Mortgage trader.
Peaceful homeowner meet Constant Anxiety.
Suprised that nobody thought of this before?
I was too, until I found out that HedgeStreet.com has a similar
product available now, although I hear that it isn’t sensitive
enough to track price movements “properly.”
Nope, for the real action we need to wait for Robert J. Schiller’s
stuff to hit the streets which is expected in late 2005.
But how do you know if either product is right for you?
Well, that is a bit more difficult to figure out, but I’ll try to
give you your two cents worth.
Here’s a short-hand method I use:
Home prices in many major metropolitan areas have risen an average
of 10.8 percent annually for the past 50 years.
That’s right – your parents who paid $30,000 for that house in 1960
weren’t just savvy real estate investors.
Nope, they had the patience to wait 34 years for that 10.8 percent
per year to compund before they pulled out their cool million.
Now for those of us who paid $300,000 ten years ago for a home:
At 10.8 percent per year your home should be worth appx. $835,000.
But home prices have risen a stunning 15.9 percent per year in some
areas, making many of our homes worth closer to $1.3 million.
So, with a little simple math, we see that many of us are sitting
on homes that are selling for $465,000 more than their historic
worth.
$465,000 in additional profit – nothing to sneeze at.
So I have a suggestion for the more enterprising homeowners among us:
If you won’t leave your primary residence and believe it’s overvalued,
buy one of Mr. Schillers “put”-type options (assuming it comes
out soon and meets our smell test).
This way you’ll be betting that if/when home prices in your
neighborhood drop you’ll make a $465,000 profit without ever having
to sell your house or move out!
But now you have a bigger problem….what to do with the money?
If you happen to think like my real-estate mogul friend, you may
ignore rising interest rates, the declining dollar and weak
housing starts to let it roll with real estate.
Of course history isn’t on your side but what the heck?
Let’s say that your money continues to compund at 15.9 percent
per year during the next 3 years.
That would turn your $465,000 into a cool $723,000.
Not bad for 3 years worth of work.
But alas, there is another option.
Let’s say you happen to be like this humble author and believe
the following:
1) That Real-Estate is historically overvalued and with interest
rates rising is very likely headed a nasty fall.
AND
2) Stocks WERE overvaled and already had their nasty fall a couple
years ago.
If you believe that (and history suggests you should) than you
could take your $465,000 and invest it into stocks.
Now, if you happen to achieve OUR average rate of 38.7 percent
per year during the past 3 years (as opposed to the 15.9 percent
in real estate) than:
Instead of having $723,000 you’d have almost $1.3 million.
NOT BAD FOR 3 YEARS WORTH OF WORK, EH?
Remember, you are what you read.
–Dylan Jovine