Closing first house in August: help me hedge!

Submitted by dkattir t3_11cwy1v in personalfinance

I've saved up some money intended for the remainder of my down payment at closing of a new build (already gave 10% at the time of signing contract, rest 10% at closing).

My worry is that real estate would've crashed in the US in 6 months. How do I hedge it so that I don't lose out then? If I sit idle and just put it in a savings account (or even buy T-bills/CDs for that matter), I stand the risk of buying at the price I agreed on last week, at possibly a much higher interest rate in August.

If the interest rate falls for whatever reason or if real estate goes up again (both unlikely, but let's assume), my house value would've gone up and I'd be buying at a lower rate and I win there.

Ideally, I'd like to hedge half the savings available (i.e. 5% home purchase cost) into a highly leveraged instrument that goes up multiple folds if the mortgage rate goes up (are there option plays on mortgage rates?). The other half I'd like to use to short the US housing market (buy DRV?)

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Maece t1_ja5o5ah wrote

I don't understand a 6 month closing. That seems... very long. Regardless...

This is money you have already committed. It's basically already out the door, it just has some time before you need to write the check. You really can't put it into any asset that incurs any type of risk. Put it in a HYSA and call it done.

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dkattir OP t1_ja5qa4f wrote

Replying to Maece (#2,040,779)

While it's true that it's money that I've put aside for down payment:

  1. If everything crashes in 6 months, my home appraisal could come at a lower price and I may have to come up with extra cash at that point. Any profit from a hedge I place will neuter that loss for me.

  2. If it goes up in 6 months, I do have an emergency fund I can lean on to cover my losses in my hedge account.

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Maece t1_ja5r2bt wrote

Replying to dkattir (#2,041,188)

What are the contingencies that you have with the contract you have signed? Are you willing to walk away if the value goes down? If financing falls through can you even do that?

Timing the market is generally a fool's errand. I get wanting to try to minimize a possible loss, but 6 months is not much of a timeline to make money to deal with an issue you are worrying about.

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dkattir OP t1_ja5s9ha wrote

Replying to Maece (#2,041,345)

If financing through the builders lender falls through, I'll get my 10% that I already put in back. I don't expect financing to fall through. There's no other scenario where I'll get my 10% back.

To your second point, well I'm not trying to time the market! All I want to do is hedge against a possible loss.

If everything crashes, I make a profit in my hedge account that I'll use to neuter my ill timed house purchase.

If everything stays the same, I don't incur any additional loss.

If housing market goes up and/or mortgage rates go down, I'll consider I bought a house I wanted for a cheaper cost and/or at a lower rate, than at closing.

I think I covered all scenarios. I'm not trying to time the market. I'm just trying to build the right portfolio that doesn't make me an overall loser in 6 months.

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Maece t1_ja5ttae wrote

Replying to dkattir (#2,041,577)

So you want upside in both scenarios, which isn't reasonable: no loss if nothing happens, profit in the hedge account if market crashes. If such an investment vehicle existed, why wouldn't I put all my money into it?

If you are concerned about mortgage rate increases, you could see if the lender you are working with would do a rate lock extension. This will cost money to do, but it lets you lock a rate in now and pay for the rate lock to extend beyond the normal 30 or 45 lock. This will likely get pricey to carry it for 6 months.

If you want to protect the house value going down, not much to do here. Good news though, live in the house long enough and you will not be upside down on it.

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dkattir OP t1_ja5vn15 wrote

Replying to Maece (#2,041,915)

Thanks for your engagement here, btw!!

>no loss if nothing happens, profit in the hedge account if market crashes. If such an investment vehicle existed, why wouldn't I put all my money into it?

Not quite. If the hedge is perfectly placed, I wouldn't make any profit or loss OVERALL.

>if the lender you are working with would do a rate lock extension.

I did consider this, but this wouldn't be an ideal hedge. I would win only if rates go significantly up. Because of the upfront cost for locking today's rate for 6 months, I would be betting the rate goes up. I feel I can do better than that. I personally feel things may remain the same then in which case I'm essentially losing money for locking the rates.

I certainly aim to stay in the house long term and that's the main reason why I bought in this crazy market.

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paynetrain37 t1_ja5zgoi wrote

You’re going to take on a 30 year mortgage but you can’t handle the equity fluctuation over 6 months? You shouldn’t be buying a home then. Or at least, you should have waited 6 months if you’re so confident in this prediction of yours.

You don’t need to try to outsmart the system. Just put your money in a HYSA, be happy with the home you get, and stay in it long enough that you build enough equity to where a little 6-month swing in equity won’t be that big of a deal.

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dkattir OP t1_ja607h1 wrote

Replying to paynetrain37 (#2,043,116)

>you should have waited 6 months if you’re so confident in this prediction of yours.

I'm not predicting anything. I want to build a portfolio wherein I don't lose overall. Please read the post again and my other comments. I can handle the fluctuation over next 6 months. I don't want to just "handle it" though. I want to protect my assets.

I'm certainly intending to stay long term, so like you said I should come out ok in the end. I'm trying to do even better than that. Thank you for your input!

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