Jeff wrote:

- quote -

Absent some stellar returns, I don't see this doing what you are
talking about. Let's use some numbers:

Value of home: $500,000

Interest rate on debt: 6%

Net worth before borrowing (all you own is the home and you have no
debt): $500,000

Amount to be borrowed (go for 100%)--$500,000

So now I invest in something that will earn 10% on the $500,000
(and, no, I have no clue what it is).

Over the next year let's assume housing drops in value by 20% (the
bubble theory).

Well, you earned $50,000, but had to pay out $30,000--so net you
made $20,000. You still have a $500,000 debt, but your assets are
$400,000 in house and $520,000 in the other investment asset. Your
net worth has still dropped to $420,000 (it didn't "protect").
This strategy, which borrowed out the entire value of the house and
obtained earnings that would be difficult to "guarantee" (those
things likely to average 10% long term have significant year to year
variations) only "protected" against 4% drop in value. While I'd
prefer not to have my house drop in value by 4% in one year, I also
likely wouldn't start panicking if it did.

In fact, I'm most likely to panic at any drop only if I was in a
position where it was likely I would have to sell the home in the
near future. And if that's the case, you'll also be forced to sell
off at least part of the investment to pay off the equity loan if
the proceeds of the sale aren't enough (and if prices decline, that
would be your problem)--but anything you invest in that could "beat"
the interest rate on the debt is going to have a risk of being worth
less than you paid for it in the near future, creating a potential
for an even greater loss.

As John mentions, in the short term it really doesn't matter what
your home is worth unless you are planning on selling it in that
time frame. Over the long term, the odds are that your residence
will increase in value. I don't worry terribly much about the value
of my residence since I don't plan to be selling anytime soon.

--
Ed Zollars, CPA
Phoenix, Arizona

Hi Folks,

I was wondering if there is a way to protect oneself from a
possible sharp drop in housing prices over the coming years.

Of course it would make sense to sell and rent, but supposing
you want to keep your home even though you suspect it will
drop in value.

One idea would be to take out a big home equity loan and put
it in a type of investement inversely correlated with property
values. Does anyone know of such a type of investment, or have
any better ideas? Thanks,

--
Jeff