100% exposure to local real estate is different than 100% exposure to a particular house
Sure. If you are happy living in that house it doesn’t seem like a big deal. Maybe you could do better by being willing to move out of that house and into another house if this one became more expensive, but for lots of people that’s a pain in the ass (and the idiosyncratic volatility is a small enough deal) that they wouldn’t want to do it and would prefer just hedge against the risk.
It might be the best hedge available due to taxes and leverage for some individuals but only once they have enough money that they won’t be screwed if their housing investment goes sideways.
If you can make your mortgage payments, how do you end up screwed if the investment goes sideways? In general, how does this change the basic calculus: I need to pay rent in this house, so I want to hedge against changes in rent?
I agree we can have a quantitative discussion about what’s optimal, but to do that you have to actually engage with the quantitative question.
If the house goes sideways your opportunity cost is going way up. Needing to move is also correlated with the value of your house going down meaning you get forced to sell low. I agree that a guesstimate model with bounds would be ideal. I think it’s actually guesstimate’s killer app to give real estate predictions much better than point estimate calculators.
Hedging against changes in rent is fine. I think that if people were to look at the total cost of the rent hedge as a straightforward insurance contract many fewer would pay it due to the very high costs. I think ownership implies less risk to people than they’re actually getting over long time spans.
Sure. If you are happy living in that house it doesn’t seem like a big deal. Maybe you could do better by being willing to move out of that house and into another house if this one became more expensive, but for lots of people that’s a pain in the ass (and the idiosyncratic volatility is a small enough deal) that they wouldn’t want to do it and would prefer just hedge against the risk.
If you can make your mortgage payments, how do you end up screwed if the investment goes sideways? In general, how does this change the basic calculus: I need to pay rent in this house, so I want to hedge against changes in rent?
I agree we can have a quantitative discussion about what’s optimal, but to do that you have to actually engage with the quantitative question.
If the house goes sideways your opportunity cost is going way up. Needing to move is also correlated with the value of your house going down meaning you get forced to sell low. I agree that a guesstimate model with bounds would be ideal. I think it’s actually guesstimate’s killer app to give real estate predictions much better than point estimate calculators.
Hedging against changes in rent is fine. I think that if people were to look at the total cost of the rent hedge as a straightforward insurance contract many fewer would pay it due to the very high costs. I think ownership implies less risk to people than they’re actually getting over long time spans.