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MessierTeam_Countrywide

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I am Currently a banker with Countrywide but have an extensive background as a local S&P and OEX trader in Chicago.  I was wondering if anyone (Realtors and Investors) has thought of creating a way to lock in a purchase price on a home in a declining market by selling futures and rolling them into future months as a creative way to buy and sell properties.  In other words  Realtors can use the CME as a marketing tool to get buyers off the fence by locking in the price of their home, and Investors can hedge and scalp as the market moves around.  The trade unit is $250 times the S&P and it is $250 per 1-point move.  In addition there are also options available to trade.  I'm sure the big boys hedge somehow against their portfolio products, but there may be a way for the average Joe to get involved.  Imagine this in a BIG declining market:

 

*Home for Sale with price guarantee!

 

*Disclaimer- purchase includes 50 SDGX6 Nov 2006 futures that must be sold short at settlement

 

What does everyone think? Makes good sense doesn't it?

 

Regards,

 

Scott Messier

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I've started to look into this myself.  It sounds good in theory, but it would be a very expensive hedge as far as I can tell unless you are only going to hedge for a short period of time.

This market also has a pretty low liquidity level, so that isn't going to help matters.  Let us know if you find out any good strategies.

wordlink

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I've also looked into this [my background is a commodity broker].

 

Minor quibble: it's 250 X the housing index, not the S&P.

 

But liquidity is the issue. This contract was made for large insurance

companies and banks to hedge. As far as I can tell, the only speculators

are floor traders, and so quick in and out is not in the cards.

 

An option on the contract makes more sense, but the bid/ask spread

is probably unbelievable.

 

I'm going to keep my eye on it though.


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It might make sense to sell CME contracts at the beginning of the house purchase so that the value of the contracts is about equal to the value of the property and then hold/rollover the contracts until such a time that the buyer decides that either the risk of holding the property naked is low or the property should be sold.  This would certainly alleviate the risk of having an upside down mortgage at the time of sale.

 

The question is, what would be the ongoing costs of holding the contracts?  If it is reasonable, this might be a sensible approach.

 

Also, there would have to be some arrangement made where the futures brokerage would link the property with the contracts.  Most brokers would want some collateral beyond the required CME contract margin.

 

 

Paul

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In theory this sounds pretty good but in practice the homeowner is very much exposed to short term risk. When and if the position goes against the homeowner's 50 short contracts, he'd be in for a world of hurt. Imagaine the market making even a mild move to the upside and the homeowner's position is now $50,000++ against him. And then he gets a margin call and of course won't come up with any additional dollars and his positions are liquidated and he's hurting.

Assuming 99% of homeowners are not experienced traders, they in no way have the emotional experience to handle 50 futures contract. They still have to manage the position.

If you're hedging in curriences or physical commodities, you do eventually intend to deliver the underlying instrument and take your hedge off...successfully locking in your selling price. But for a homeowner, it's a different story and without the ability to synchronize the future sale of the house and the covering of the shorts, it could be real ugly.

Agsurfer--there would be no need for additional collateral as the broker would just issue a margin call and close out the position if no additional funds are available.

Bottom line is, the homeowner could be absolutely correct in the long term direction of the housing market--down, but in the short term, due to volatility, suffering severe unsustainable losses.
RobertCampbell

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Reply with quote  #6 

 

 

 

To reduce risk when hedging, instead of buying puts or calls, why not sell a credit spread?

 

Robert Campbell

BenJones

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Reply with quote  #7 

The market for CME housing futures is not looking too good due to a lack of liquidity.  The operational hedgers need to come first before there's room for arbitrageurs and speculators.  How many people do you know who hedge their personal petrol consumption by buying crude contracts on the NYMEX far-forward?

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Quote:

When and if the position goes against the homeowner's 50 short contracts, he'd be in for a world of hurt. Imagaine the market making even a mild move to the upside and the homeowner's position is now $50,000++ against him. And then he gets a margin call and of course won't come up with any additional dollars and his positions are liquidated and he's hurting.

 

That was what I meant by somehow tying the home equity into the contract.  If you short an equitable number of contracts and home prices go up, your negative contract margin would be offset by the increase in home equity.  I don't know if this would be practical however. I'm guessing there would be some legal issues with tying your home equity into a futures account.

 

 

 

 

 

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Quote:

To reduce risk when hedging, instead of buying puts or calls, why not sell a credit spread?

 

I'm not sure if I follow you here.  Are you suggesting doing a spread between near and far term interest rates to manage the risk of an increase in an ARM rate?

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i think the lawyers would love the lawsuit business deals like this would generate.

Mike

 

AgSurfer

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Quote:
i think the lawyers would love the lawsuit business deals like this would generate.

You've got that right!

 

BTW - I wonder how many people have considered that a lot of RE "investors" have actually been doing nothing more than futures speculation.

 

If you purchase a spec property for $500k with a 5% downpayment, in essence you aren't doing anything different than purchasing a futures contract with a 5% initial margin.  Unfortunately, most people don't appreciate that leverage can work against you as much as it can work for you.  Your 5% margin will be wiped out pretty fast if the real estate market takes a dip.  (And that's not counting the transaction costs included with buying/selling property) 

 

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Quote:
Originally Posted by AgSurfer

Quote:
i think the lawyers would love the lawsuit business deals like this would generate.

You've got that right!

 

BTW - I wonder how many people have considered that a lot of RE "investors" have actually been doing nothing more than futures speculation.

 

If you purchase a spec property for $500k with a 5% downpayment, in essence you aren't doing anything different than purchasing a futures contract with a 5% initial margin.  Unfortunately, most people don't appreciate that leverage can work against you as much as it can work for you.  Your 5% margin will be wiped out pretty fast if the real estate market takes a dip.  (And that's not counting the transaction costs included with buying/selling property) 

 

Well are they buying a futures contract or an option? I think it's an option. They have the right to buy if they want, but not the obligation. If they dont' buy they lose their 5% but that is it. Under futures arn't you obligated to buy at the future date at that price if you can't unload the contract to someone else? If i'm wrong let me know.

Mi

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Quote:
If they dont' buy they lose their 5% but that is it. Under futures arn't you obligated to buy at the future date at that price if you can't unload the contract to someone else?

 

To be honest, there are others who post on this board who can answer this question better, but in my opinion, the 5% down is more like a futures contract.  Yes, in many cases you can walk away and just lose your 5% down, but you're also going to destroy your credit rating for a long time afterwards.   Remember, you are signing a contract when you sign your loan docs, and you do promise to pay back the loan in full.

 

However, I saw some other info posted here under another heading indicating that it might not be so easy for someone to walk away from their mortgage in the future.  Evidently, refi's and other situations that change the original loan on a property can invalidate the terms that protect a borrower from a deficiency judgement.  If this is the case, then for all practical purposes the borrower has the same risk exposure as in a futures contract.

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Quote:
Originally Posted by AgSurfer

Quote:
If they dont' buy they lose their 5% but that is it. Under futures arn't you obligated to buy at the future date at that price if you can't unload the contract to someone else?

 

To be honest, there are others who post on this board who can answer this question better, but in my opinion, the 5% down is more like a futures contract.  Yes, in many cases you can walk away and just lose your 5% down, but you're also going to destroy your credit rating for a long time afterwards.   Remember, you are signing a contract when you sign your loan docs, and you do promise to pay back the loan in full.

 

However, I saw some other info posted here under another heading indicating that it might not be so easy for someone to walk away from their mortgage in the future.  Evidently, refi's and other situations that change the original loan on a property can invalidate the terms that protect a borrower from a deficiency judgement.  If this is the case, then for all practical purposes the borrower has the same risk exposure as in a futures contract.

Wait a minute. If you walk away from your deposit it has NO effect on your credit rating. You are actually abiding by the contract terms which are "you lose your deposit if you walk away" This is very different from defaulting on a mortgage.

 

Now walking away from your mortgage is a default and yes that will slam your credit badly. Yes if you refi'ed the mortgage is no longer "purchase money" and hence it will allow the lender to seek a deficiency judgement (in CA at least).

 

So it is not like a future at all but an option. You put a deposit which gives you the right to purchase the house on the closing date, but you don't have to. If you choose not to, you forfeit the deposit. In a future on settlement date you must either deliver the goods to sell or pay the money to buy on that date.

Mike

 

AgSurfer

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Quote:

You put a deposit which gives you the right to purchase the house on the closing date, but you don't have to.

 

Oh oh.  I see there is some confusion here on our (my) choice of terms.  I was referring to the actual downpayment you would put into escrow for the purchase of a property, not the earnest money that you put in to show you are good for the initial offer.

 

Once the loan docs and other papers are signed, your downpayment would be the equivalent of your initial margin in a futures contract.  There were (and I assume still are) lenders who will give terms of as little as 5% downpayment which gives you about the same leverage on the property as a futures contract.  But once escrow has closed, you have signed a contract which means that you are on the hook to repay the full loan plus interest.  You can't just walk away without serious consequences.

 

As a practical matter, you could actually be at even greater risk in a home purchase than with a futures contract because no broker will let you open an account with only the initial contract margin.  Most brokers will require extra funds in the account to cover a potential drawdown beyond the initial margin.  So even if you open a losing trade, you can often jump out with a big loss, but you won't be bankrupted.

 

With a home purchase, you can't liquidate your position so easily, especially if you find yourself looking at an upside down mortgage.  In fact, I see this situation as being the equivalent of being caught in a locked limit move in a futures trade.  That's the worst nightmare of any futures trader. (other than perhaps the CFTC or IRS)  You can't liquidate your position because of the market conditions.  I suspect that if we see a really nasty downturn in the housing market, a lot of homeowners will find themselves in a similar situation.

Jeff

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Quote:
Originally Posted by AgSurfer

 

BTW - I wonder how many people have considered that a lot of RE "investors" have actually been doing nothing more than futures speculation.

 

If you purchase a spec property for $500k with a 5% downpayment, in essence you aren't doing anything different than purchasing a futures contract with a 5% initial margin. 

 

If I understand correctly, there are four differences (two big ones).

 

1.  It is very, very hard to do a 5% initial margin in futures speculation (is this right?).

2.  Futures speculation doesn't produce a monthly cashflow (is this right?).

3.  The government doesn't subsidize futures speculation (but does subsidize RE investing!).

4.  Futures speculation has the additional risk of "calls" (there are no "calls" if RE takes a downturn).

 

Any errors? 


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AgSurfer

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Quote:

If I understand correctly, there are four differences (two big ones).

 

1.  It is very, very hard to do a 5% initial margin in futures speculation (is this right?).

2.  Futures speculation doesn't produce a monthly cashflow (is this right?).

3.  The government doesn't subsidize futures speculation (but does subsidize RE investing!).

4.  Futures speculation has the additional risk of "calls" (there are no "calls" if RE takes a downturn).

 

Any errors? 

 

Jeff,

 

You've raised some good points, but I don't completely agree with your conclusions.  To address your questions:

 

1.  A 5% margin is possible on many futures.  For example, the CBOT 30 yr T-Bond is trading at 109'19 as I write this.  With a big point value of $1000/pt, a single contract is worth $109,594 today or $100,000 at maturity.  The initial margin required by the CBOT is $1,215 per contract.  That's a 1.2% margin based on the maturity value.  (Note: Many brokers require more than the minimum required margin, but most brokers will let you buy a T-Bond contract for $3,500 or less.  That's still under 5%)

 

2.  It depends on what you mean by cashflow.  Holding a futures contract doesn't produce a cashflow, but I know people who trade frequently so that they do produce a monthly income stream.  Conversely, a home doesn't produce a cashflow either if you live in it.  This only applies to rental property.

 

3.  Actually, the government does subsidize futures speculation in the way of favorable tax rates. Commodities futures capital gains/losses are reported on Form 6781 (Section 1256 Contracts), which qualifies these for an advantageous tax split: 60% at the long-term rate of 15% and 40% at the ordinary short-term rate of up to 35%, or a combined rate of 23%, for a tax savings of 12%.

 

4.  If a position goes against you, the broker could hit you with a margin call, but the intent is to protect the trader just as much as to protect the broker.  However, in practice, a trader exercising good money management principles should not see this happen.  First, your account equity should be far larger than the required margin for your positions. Second, good money management dictates that any single loss on a position should never be more than 2% of the total account equity.  Consequently, a trader will normally have exit stops (either real or virtual) in place to prevent taking an abnormal loss on open trades.

 

As I mentioned previously, the one big risk to a trader is being locked into a trade where the daily price changes get to the limit move level.  In this case, a trader may not be able to exit a position until a huge loss has occured.  But, as I also stated, a homeowner is essentially in this same position.  If you buy a house near a market peak and try to sell when the market is dropping, it may be very difficult to sell the property without taking a huge loss.  (Keep in mind the big transaction costs involved.)

 

So in general, I believe that many recent RE buyers have inadvertantly exposed themselves to essentially the same risks as futures trading. Even though the terminology is different, the numbers still indicate the same potential for loss.

Jeff

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Thank you for your response and for helping to educate me...

Quote:
Originally Posted by AgSurfer
 

Jeff,

 

You've raised some good points, but I don't completely agree with your conclusions.  To address your questions:

 

1.  A 5% margin is possible on many futures.  For example, the CBOT 30 yr T-Bond is trading at 109'19 as I write this.  With a big point value of $1000/pt, a single contract is worth $109,594 today or $100,000 at maturity.  The initial margin required by the CBOT is $1,215 per contract.  That's a 1.2% margin based on the maturity value.  (Note: Many brokers require more than the minimum required margin, but most brokers will let you buy a T-Bond contract for $3,500 or less.  That's still under 5%)

 

2.  It depends on what you mean by cashflow.  Holding a futures contract doesn't produce a cashflow, but I know people who trade frequently so that they do produce a monthly income stream. 

 

 

 

By cashflow, I mean income from holding an investment, not from selling it.  If your friends are selling investments and then making money, good for them, but that is not what I call cashflow--they no longer hold those investments.  With RE investing you can have your cake and eat it too--you can produce income AND keep the investment.

 

Quote:
Originally Posted by AgSurfer
 

 

 

3.  Actually, the government does subsidize futures speculation in the way of favorable tax rates. Commodities futures capital gains/losses are reported on Form 6781 (Section 1256 Contracts), which qualifies these for an advantageous tax split: 60% at the long-term rate of 15% and 40% at the ordinary short-term rate of up to 35%, or a combined rate of 23%, for a tax savings of 12%.

  

 

 

If I understand what you are saying here, you seem to be talking once again about taxes on "sales," not on "investing" (in the sense that you get government support for holding, as opposed to selling your investment).  RE investing gets similar (the same?) tax subsidy on gains--which change from year to year (for example, long-term capital gains rates for middle income tax payers will go down to to 5% through 2007, and to zero in 2008!). 

 

But where RE differs (I think) is that the government subsidizes the "holding" (not selling!) of such investments.  If you sell an investment you are no longer "investing" (at least in that investment).  The best example of this is deprecation--where you can get significant support/subsidy with no out of pocket expenses.  In extreme (rare?) cases, deprecation can equal nearly 50% of your RE investment.  This is true government subsidy...  

 

Government subsidy of sales (capital gains) just encourages people to move OUT of an investment, deprecation encourages moving INTO an investment and holding it.  That seems like a qualitative difference to me.

 

Quote:
Originally Posted by AgSurfer
 

 

  

If you buy a house near a market peak and try to sell when the market is dropping, it may be very difficult to sell the property without taking a huge loss.  (Keep in mind the big transaction costs involved.)

 

So in general, I believe that many recent RE buyers have inadvertantly exposed themselves to essentially the same risks as futures trading. Even though the terminology is different, the numbers still indicate the same potential for loss.

The difference, of course, is that the RE investor (and his choices?) gets to entirely 100% determine the timing of his exit.  If the market goes down, he can choose to simply hold and wait for a market upswing (especially if the property is cashflow positive, this will cost him nothing).  There is no one to force him to sell at the "absolute worst time."

 

This is different from futures speculation where if the market goes down, you are forced to sell at "the absolute worst time."

 

This freedom to choose the timing of your exit strategy is another qualitative difference.

 

 


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mad_tiger

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"The difference, of course, is that the RE investor (and his choices?) gets to entirely 100% determine the timing of his exit."

This is ironic given today's NAR report on existing home sales which shows 7.3 months of inventory, a 13-year high.  Try telling someone who has their property on the market today that they have 100% control over the timing of their exit.  Of course if they drop their price enough.....

Real estate investing has its advantages but liquidity is not one of them.
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Quote:
Originally Posted by mad_tiger

Real estate investing has its advantages but liquidity is not one of them

 

Hey...who said anything about liquidity?  I never meant to suggest that selling in a down market was easy, quite the opposite, I said that--for RE--selling in a down market (exactly the time that you don't want to sell) was not required!

 

The same can not be said for futures speculation...


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Reply with quote  #21 
Quote:
Originally Posted by AgSurfer

Quote:

If I understand correctly, there are four differences (two big ones).


So in general, I believe that many recent RE buyers have inadvertantly exposed themselves to essentially the same risks as futures trading. Even though the terminology is different, the numbers still indicate the same potential for loss.



Ag, I think the big difference is the black and white reality of Futures being daily marked to market. In real estate, you might be leveraged but you won't suffer emotional stress or margin calls if the market goes against you. In Futures, you may be right over the long term but the short term volatility can wrench both your gut and brain. And you just never know if it's a little counter trend move or a total market turn. You can hold on to real estate and ride out counter trend moves with much more ease than riding the bucking bronco of Futures speculation.
AgSurfer

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Quote:

The difference, of course, is that the RE investor (and his choices?) gets to entirely 100% determine the timing of his exit.  If the market goes down, he can choose to simply hold and wait for a market upswing (especially if the property is cashflow positive, this will cost him nothing).  There is no one to force him to sell at the "absolute worst time."

 

I think you are assuming that a buyer can always afford to wait and hold.  I've seen many posts on both this board and others that describe scenarios where buyers are sweating bullets waiting for their ARM's to reset.  If a buyer goes into default, they will be forced to exit both their position AND their home, and not exactly at a time of their own choosing!

 

Also, you are assuming that a property price will eventually go back up to the level where it was originally purchased.  Nothing is guaranteed in any market. (Except taxes.   )  But then again, we all know that SoCal real estate only goes up, right?

 

Quote:

Ag, I think the big difference is the black and white reality of Futures being daily marked to market. In real estate, you might be leveraged but you won't suffer emotional stress or margin calls if the market goes against you. In Futures, you may be right over the long term but the short term volatility can wrench both your gut and brain. And you just never know if it's a little counter trend move or a total market turn. You can hold on to real estate and ride out counter trend moves with much more ease than riding the bucking bronco of Futures speculation.

 

Yes - I definitely agree with this.  Because of the frequency and volume of trading, futures prices show localized volatility even when a major trend is in place.  Because real estate trades much less frequently and the data is only reported on a monthly basis at best, you aren't as susceptable to having your emotions jerked around.

 

However, I think there is a down side to this too.  Because real estate data is reported infrequently, a buyer won't know exactly where they stand at any particular point in time and a change in market trend won't be obvious until a buyer has already lost at least part of the equity.

 

There are definitely differences between RE and futures trading.  My main point here is that from a numerical perspective, a home buyer is exposed to essentially the same level of financial risk as a futures trader.  SD home buyers haven't appreciated this fact until just recently because they were able to benefit from a strong upward trend.  However, anyone who purchased property with a small downpayment in the last year will appreciate that their downside risk is serious.

Jeff

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Reply with quote  #23 
Quote:
Originally Posted by AgSurfer

 

I think you are assuming that a buyer can always afford to wait and hold.  I've seen many posts on both this board and others that describe scenarios where buyers are sweating bullets waiting for their ARM's to reset.  If a buyer goes into default, they will be forced to exit both their position AND their home, and not exactly at a time of their own choosing!

 

I am NOT assuming that a RE buyer can always afford to wait...we are not talking about not being able to "afford" an investment.  We are talking about differences in "risk."  If an investor, either in RE of futures speculation, can not "afford" their investments--then they can't afford them.  There is no difference between the two in this risk.

 

What IS different, related directly to risk, is that a RE investor that can afford an investment can certainly choose to not sell.  In direct contrast, a futures speculator than can equally afford an investment can have his decision to sell ripped from him.  No matter how well he plans, his investment can be "called" at exactly the worst time.

 

Is a RE investor that doesn't plan well at risk?  Sure, but so is a futures speculator that doesn't plan well! 

 

The important difference, of course, is that the RE investor who plans well is at LOWER risk than the futures speculator that plans well.  There are no "calls" in RE investing.

 

 

 

Also, you are assuming that a property price will eventually go back up to the level where it was originally purchased.  Nothing is guaranteed in any market. (Except taxes.   )  But then again, we all know that SoCal real estate only goes up, right?

 

 

Once again, there is NOTHING in what I said about the differences between the two investment choices that are dependent on housing prices going up.  I made NO such assumption.  The similarities and differences are there whether or NOT prices go up.  All I said is that a RE investor could choose to hold if he so desired, whereas a futures speculator does NOT have this option.  I never said whether or not such a decision was smart, only that it was there in one case and not the other... 

 

Are you saying that  futures speculators buy futures WITHOUT the assumption that they will go up*?  That I just can't believe...

 

 

*or down??  Is that how it works?


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AgSurfer

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You're making a lot of qualifications about RE buyers to claim that their risk is lower.  If someone buys a property for $500k with 5% down,  they'll have to fork out $3000/mo to hold the property - that's a pretty hefty carrying charge.  They're also assuming that their status quo won't change over the life of the loan so that they can keep paying the $3000/mo. until it's paid off.  (During which time they will have paid out about $605k in interest!)

 

The truth of the matter is, most homeowners who can't afford to hold their homes WILL get sold out (foreclosed) at the worst time too.  They'll be out of work, possibly having medical problems and who knows what else.  On top of that, when the banks do foreclose, the ex-owners will also be out of a place to live!

 

An experienced futures trader uses good money management to prevent the scenario you described.  (Being forced to sell a position.)  While there is no absolute guarantee that won't happen, good money management keeps the risk to a minimum.  Anyone who trades futures without using good money management principles is a fool and asking for big trouble.  This includes having sufficient funds to open an account.

 

I'm contending that a lot of homebuyers never considered the concept of risk and money management when they bought their homes.  They bought with the idea that SD RE always goes up and that there would always be a greater fool waiting to buy if/when they decided to sell their property.  They never considered that buying with a small downpayment and expecting to sell later at a higher price is no different than buying a futures contract with a small margin with the intention to sell later at a profit.  If their home values take a dive, they'll be in exactly the same financial position. 

 

And don't expect the lenders to be any more sympathetic than a futures broker.

Jeff

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Quote:
Originally Posted by AgSurfer

You're making a lot of qualifications about RE buyers to claim that their risk is lower.  If someone buys a property for $500k with 5% down,  they'll have to fork out $3000/mo to hold the property - that's a pretty hefty carrying charge.  They're also assuming that their status quo won't change over the life of the loan so that they can keep paying the $3000/mo. until it's paid off.  (During which time they will have paid out about $605k in interest!)

 

The truth of the matter is, most homeowners who can't afford to hold their homes WILL get sold out (foreclosed) at the worst time too.  They'll be out of work, possibly having medical problems and who knows what else.  On top of that, when the banks do foreclose, the ex-owners will also be out of a place to live!

 

An experienced futures trader uses good money management to prevent the scenario you described.  (Being forced to sell a position.)  While there is no absolute guarantee that won't happen, good money management keeps the risk to a minimum.  Anyone who trades futures without using good money management principles is a fool and asking for big trouble.  This includes having sufficient funds to open an account.

 

I'm contending that a lot of homebuyers never considered the concept of risk and money management when they bought their homes.  They bought with the idea that SD RE always goes up and that there would always be a greater fool waiting to buy if/when they decided to sell their property.  They never considered that buying with a small downpayment and expecting to sell later at a higher price is no different than buying a futures contract with a small margin with the intention to sell later at a profit.  If their home values take a dive, they'll be in exactly the same financial position. 

 

And don't expect the lenders to be any more sympathetic than a futures broker.

No fair! 

 

I am not saying that RE investors overall risk is lower...I am not saying that they are smarter, or more experienced, or better-looking.  I am saying they don't experience "calls."  This is true.

 

You seem to want to compare a poor RE investor who gets trapped into a bad investment with a experienced futures trader who uses good money management.  To use your own terms, you are comparing a "fool" to an experienced investor.  This is not only an "unfair" comparison, it is not even relevant to our discussion about "calls."

 

The fact of the matter is that, for the RE investor, the risk of a "call" is zero.  For even an experienced futures trader, the risk of a "call" is some number above zero...


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AgSurfer

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Reply with quote  #26 

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The fact of the matter is that, for the RE investor, the risk of a "call" is zero. For even an experienced futures trader, the risk of a "call" is some number above zero

I think this statement depends on the definition of your term "call."  You've used the term strictly in reference to a situation when a broker has to call a trader and ask for more money to cover the margin requirements for a trade that has gone sour.  If the trader can't or won't put up the extra funds, the broker will liquidate the trader's position at market.

 

Granted, lenders do not call RE buyers and tell them they have to put up more money for their homes to cover a loss in equity.  In that sense alone a RE buyer will never get a call.

 

But, there are other situations that, for all practical purposes, serve the same purpose. If a buyer loses their source of income and can't make the monthly payments on the property, they will suffer even worse consequences.  The lender will give them a call, and also serve them with some nasty legal documents.  And if the buyer doesn't do as the lender says, they will eventually get a visit from the local sheriff who will readily escort them into the street.  Even though the terminology and methodology is different, from a practical viewpoint I don't see a foreclosure as being any different than a margin call.  In either case the "investor" takes a big loss at a time not of their choosing.

 

(BTW, if you read the fine print, you'll find that many loan docs have a clause that gives the lender the right to demand payment in full at any time.)

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Reply with quote  #27 
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Originally Posted by AgSurfer
 

But, there are other situations that, for all practical purposes, serve the same purpose. If a buyer loses their source of income and can't make the monthly payments on the property, they will suffer even worse consequences.  The lender will give them a call, and also serve them with some nasty legal documents. 

 

 

Once again, are there risks in RE investing?  Yes.  Can you lose everything?  Yes...

 

...but...

 

Quote:
Originally Posted by AgSurfer
 

 

And if the buyer doesn't do as the lender says, they will eventually get a visit from the local sheriff who will readily escort them into the street.  Even though the terminology and methodology is different, from a practical viewpoint I don't see a foreclosure as being any different than a margin call. 

 

Of course a foreclosure is qualitatively different from a margin call.  A foreclosure results from a failure of the investor to fulfill his contractual obligations...to do as he said he was going to do.  If the investor fulfills his part of the bargain, there is ZERO risk of foreclosure.  This is true if the market goes up, or the market goes down--risk of foreclosure is entirely independent of market changes.

 

Margin calls (if I understand correctly) are qualitatively different from foreclosures in that they do NOT result from a failure to fulfill contractual obligations.  They result form changes in the market.  It doesn't matter if the investor is fulfilling his part of the bargain or not.  Unlike forclosres, the risk of calls is entirely dependent on market changes. 

 

Summary:

 

Foreclosures result from contractual failures and are independent of market changes.

 

Margin calls do NOT result from contractual failures and are entirely dependent on market changes.

 

What could be more different?

 

Quote:
Originally Posted by AgSurfer
 

 

(BTW, if you read the fine print, you'll find that many loan docs have a clause that gives the lender the right to demand payment in full at any time.)

Not my loan docs!  


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Foreclosures result from contractual failures and are independent of market changes.

 

Not sure I'd agree with that one.   Do you think that more people lose their jobs in a good economy or a bad one?  If you are a real estate agent with a big mortgage payment,  (I'm sure that no RE agents are really in this position     )  do you think that your income has nothing to do with the housing market?

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Originally Posted by AgSurfer

 ...do you think that your income has nothing to do with the housing market?

Of course. 

 

My income has nothing to do with the housing market...I am unemployed!

 

Ditto for RE investors with good money management who buy cashflow properties.  The price of the home can go down, for long periods of time, but there will be NO RISK of foreclosure.  They can NOT be forced to sell at a loss. 

 

Once again, this is entirely unlike futures speculators.  Even with good money management, they are at risk of having to sell at a loss whenever the market changes. 


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We're just going back and forth on this and most likely losing the interest of everyone else on this board.

 

However, I will make one prediction here - let's see if I'm right.  In about 6 to 12 months, there will be a glut of foreclosures on the market as the ARMs reset and other market and economic factors come into play.  Consequently, there will be a significant number of homeowners who WILL be forced to vacate their properties and take a big financial loss.  At that point, they will concede that their risk of being forced to exit their position has gone from 0% to 100%.

 

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