Notes From Gordon: How to Play The Coming Housing Market Crash

This is an abridged version of what I will be teaching when Gordon Philips Academy launches. Since I don’t have a spreadsheet to show you, I’ll keep this simple since the math involved was taught in the 7^th grade… 5^th grade if home schooled.

What I am about to explain will scare you. It’s not on teevee and you probably won’t hear it from your friendly neighborhood realtor.

If you plan to stay in your current home for the rest of your life, who cares if the equity sags? It’s your shelter and it will be paid off eventually.

If, on the other hand, you do NOT plan to stay in your current house for the rest of your life, then the equity in your home is NOT an investment, it is a trade. Which makes you a trader. And all good traders must manage risk vs. reward.

Those who do not manage risk vs. reward are very brave. We call them gamblers.

The post-COVID real estate bubble has already started to deflate and could drop as much as 30%. We call this a correction. A real crash is more like 50%, but I’ll call it a crash anyway because 30% is still gonna’ leave a mark.

Let’s look at Joe. Joe bought his house in 2020 for $300,000. His home has since appreciated by 50% to $450,000.

Let’s say a crash does happen and the appraised value of Joe’s home drops by 30% to $315,000. Now Joe is $15,000 above where he started 5 years ago, for a net gain of just 3.3%. Ouch!

But, it gets worse. Remember, we are pricing everything in units of a continuously depreciating asset class: the dollar.

Over the past 5 years the dollar has lost a true 6%* in purchasing power each year, for a 5-year compounded loss of 26.6%.

* When the government tells you that inflation has been 3% they’re holding their hands behind their back with their fingers crossed. Remember, the Consumer Price Index (CPI) does not include food or energy.

Back to Joe. $315,000 is actually worth just $231,210 in 2020 dollars, or $68,790 less than he bought his house for. Double ouch!

What is Joe to do? He has three choices.

Choice #1:  Joe does nothing. He wears out his worry beads and hopes that the market recovers one day, preferably before he’s pushing up daisies.

Choice #2: Joe stays in the house and reads a blog that says you can buy just enough of an inverse realty ETF like REK to hedge the decline in equity. This is a tricky move that requires some math, skill and experience (I will be teaching it soon). Joe has never done this before and may need another set of worry beads. Good luck, Joe!

Choice #3: Joe sells at the top, today, before the crash. His friends think he’s nuts. He pays off the existing mortgage of $200,000, takes the $250,000 in profit, pays the capital gains tax, pockets a cool $200,000, moves to West Virginia where everyone is armed to the teeth to repel the coming zombie invasion and and buys a rural, three bedroom home on several gorgeous acres and in good structural condition that needs some TLC, for $200,000 cash with no mortgage.

Joe is an excellent trader. He sliced a bunch of profit off the top of the realty boom, then used it to slash his cost of living in advance of the Big Inflation and is now immune to the Great Taking which, if you don’t know what I’m talking about, will give you the shivers.

So Joe has three choices. Monty Hall would have asked, “What will it be… Door #1, Door #2, or Door #3?”

Joe picks Door #1. BZZZZZZT!

(Audience): Ohhhhh!

“Joe, please accept this consolation prize. It’s a lovely set of gold-plated handcuffs, and thank you for joining us on Let’s Make A Deal!”