Challenge
I bought my CA home for 200K in May 2002. Appraised last week at 420. So in theory 220K in equity. What are my options for hedging huge risk of large decline.
First, sell home. No way. I have a good job. Enjoy living here. Home might still go up in value for 2-3 more years. Home prices might decline but not crash. All other homes nearby are outrageous so where would I live? I could rent, but rents have gone up a bit too. And don't like living in apartments.
Second, borrow 220K in equity from the bank and invest in something. Problem. I cannot borrow 100% of the equity because I bought the home for no money down. So I still owe 192K with monthly mortgage payments of 1200. Tax and ins. add another $300 a month.
SO I cannot afford the payments on loan of 220K plus 192K or 420K. The payments would be too high.
I can refinance for 300K, get 100K in cash and I can afford the 1700 a month payments.
But now what do I do with the 100K in cash?
Someone suggested buying puts on home builders and mortgage lenders. But I think puts are too expensive and too risky.
If you believe puts are realistic. Identify a specific stock, specific put prices, and specific ways to hegdge. It's one thing to spout theory. But in reality, I think it's probably just safer to go long and collect dividends. Then your holding period is infinite. Puts expire in 2-3 years. Short term puts would be too expensive.
Though I would certainly consider putting some money in puts. More as an investment option than as a specific hedge against decline of the CA property value.
The way I figure it. The home is overvalued and really isn't worth 420K. But like Amazon in 1999 and Yahoo in 1999 it might still go up. BUt the problem is I live in the home and will not sell it now.
The best I can do is borrow the equity while it's still there. Just like AOL American Online bought Time Warner while AOL stock was high and before people figured out it wasn't worth the sky high prices being paid. Such prices are unsustainable.
So I figure borrow as much money as I can at cheap interest rates before the bank and the appraiser figure out that the home really isn't worth that much.
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