GP Academy Letter 250820: Your Home Equity Is Headed Down. What To Do.

Dear Friends,

Can you hear those sonic booms in the far distance? That’s the U.S. residential housing market starting to crack.

Here is just one article in the news today. BOOM!

Housing Market Cracks Widen: Top Siding Company Suffers Worst Stock Collapse In 50 Years

Do you still have a mortgage? Perhaps a substantial mortgage? By what percentage would the housing market have to drop until your mortgage balance was greater than your current equity, thereby placing your mortgage “under water?”

Do you consider your home to be shelter from the elements, as has been traditional for 5,500 years, or are you gambling counting on home equity as part of your retirement planning?

Please repeat after me: “Our father, who art in heaven…”

Hey, just having a little fun. Back to reality. The solution to things that sag (…and don’t I know how that feels!…) is to hedge, meaning to offset or counterbalance.

Little Jimmy wants to play on the schoolyard seesaw. His friend, Porky, wants to sit on the other end. In order to keep the teeter totter horizontal, Jimmy will need to invite his friend, Slim, to join him.

Jimmy thereby offsets Porky’s excess “avoir du pois,” using Slim as a hedge. See? Easy, peasy.

How to offset the decline in home equity? The answer is to transfer a portion of your current electronic assets (401k, IRA, etc.) into an inverse Exchange Traded Fund (ETF) that will increase in value as the housing market drops.

If done correctly, for each percentage drop in home equity the ETF will gain by the same amount. You are now fully hedged. Meanwhile, your neighbors could not sell their homes if they wanted to. Why not? They’re “under water.”

You head down the hall with a jaunty step to talk to Karen in Human Resources and learn that there is no company brochure that will allow you to do this with your 401k.

No problem. You sign up with an online IRA custodian that helps you roll your 401k into a self-directed IRA, without penalty, and make your own investment decisions. Problem solved.

Or, you could do nothing, ride out the realty market drop and wait for residential real estate to climb higher once again. But this could take many years, during which the actual value of your home equity will have decayed by about 6% per year due to inflation.

So that when the housing market does reach its former high once again (assuming, of course, that it does), its value could be even less than it was before the drop.

Why? And here is where you must brace yourself. The underlying problem here is that your entire world is denominated in a severely depreciating asset class: the U.S. dollar.

Why would you expose yourself to this slow-motion carnage when a good chunk of your world should be shored up with gold? And what would gold be in this context?

Gold = Jimmy. Get it?

But you haven’t done this. Gold has skyrocketed in recent years and you still don’t own any. Why not? “Too weird. Besides, where would I buy it? What kind, and how much? And where would I keep it?”

So many questions…

I am retarded retired these days from financial consulting, however I’m still as sharp as a marble tack and would be pleased to help. I also charge a fraction of what I used to for my inestimable modest consulting skills and won’t break the bank.

The first call is always on the house.

Visit www.ScheduleWithGordon.com and put some time on my calendar.

BTW, don’t look now, but Porky is sitting on the roof…