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Let's say I want to buy a home, with intent to sell it down the road ( < 10 years). If I want to minimize my exposure to market fluctuation, what would be the best way to accomplish that?

I guess buying a put option on a REIT index or something might be a possibility, but I have no idea what the costs are / how maintainable it would be etc.

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4 Answers 4

up vote 7 down vote accepted

You could purchase Home Equity Insurance. Here is a paper by Robert Shiller and Allan Weiss about how it would work: Home Equity Insurance. Sadly this type of protection is hard to find.

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This is exactly what I was looking for! Thanks! –  Enno Shioji Nov 22 '12 at 10:27

Buy below market. Find someone who really is desperate to sell, and help them out. But help yourself out in the process.

Treat the purchase of the property as an investor would, and make your money when you buy.

Another thing to reconsider is selling down the road. Why not rent it out? I suspect there will still be a lot of people needing to rent. A foreclosure or bankruptcy takes a long time to age out, and there have been a lot of those.

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I think this is the answer in the end. If you don't get a deal to start with you're just betting on the housing market. –  C. Ross Nov 23 '12 at 12:34

You have to take a look at the risks:

  1. You pick poorly, and only your house fails to make a profit.
  2. The entire area suffers a drop in prices
  3. The entire country suffers.

A REIT or REIT index will not help in the 2nd and 3rd cases. The loses are too broad.

The losses can be paper only for many people until they need to sell. In fact the only time there might be losses is when you need to sell. Many people lost money on paper when the last bubble burst, in fact they were giving back paper gains. The people that lost the most were those that had to sell. Their house was dropping and they found it hard to sell at any price. The market changed. It went from anything could sell in days; to nothing would sell for months.

Renting the house doesn't protect you. If your monthly costs are greater the rental income, you will be losing real dollars every month. Yes I know there is deprecation, which can help with taxes, but even that can't help all rental properties or ensure you can sell when you need to.

How much of a hedge would you need to protect you from more than $100K of potential losses?

The alternative is not to buy, just rent. You can move after every lease. Of course risks involved with renting still exist. If the prices are rising they sometimes bring the rents up with them.

The best approach is to buy a house that meet your needs for as long as long a window as possible. Don't buy so much that the required payments stretch you too thin. Over time the monthly costs should become a smaller portion of your income. That is how you protect yourself.

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Buying an investment property when the market is at or near rock bottom (like right now) is a great way to virtually eliminate the risk of equity loss. Besides price, you need to consider the location. Look for markets where rental demand is high, industry is booming (or about to boom).

If you are looking for a good market to invest in, check out what my research revealed in this latest article "How to Find Foreclosure Discounts in the Current Market" at http://www.bankforeclosuressale.com/wp/article-11144068.html.

Simon Campbell - http://www.bankforeclosuressale.com

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