My Take On “The Intelligent Investor: The Greatest Real”
February 21, 2012 5:49 am Real EstateBuying house price insurance, real estate estate put or call options, or a guaranteed selling price payment is a risk transference mechanism. Risk transference works as protection against loss and as a hedge only if there are parties who do not bear the same loss at the same time. For example, fire insurance works because only a few homes in an area catch fire per year.
With close to 60 percent of US households owning their own homes, a national decline in home prices would affect all those paying premiums and a large share of the US population. In effect, US homeowners would become self-insurers and it would wind up costing them the average loss of value plus administrative costs. For the most part, homeowners are the wealthier people in the US and they would likely suffer additional losses in their direct and pension investments in stocks and bonds of banks and insurance companies who entered the real estate price hedging business.
Home price hedging does not seem to be doable on a national scale when home prices decline in most (all) US real estate markets and a majority of US owns homes.
