How Homeowners Can Protect Against Home Price Declines

Gimme Shelter

The low interest rate environment of the last few years fueled the housing market, and sent prices skyrocketing. Now, some homeowners are eyeing the potential impact of the Federal Reserve’s tightening monetary policy and fearing a reversal of that trend. Though limited supply has made prices sticky, some figure those same valuations are bound to fall eventually.

For those who aren’t ready to sell their home to lock in today’s prices, there are strategies to consider. Essentially, these tactics involve capitalizing on the still relatively low cost of mortgage debt while earning a differential from other options.

Futures and Options

Selling futures is one route a homeowner could take in order to secure a partial offset to a decline in home values. The hedge involves a one to three-year contract pegged to the S&P CoreLogic Case-Shiller Home Price Index, set to a higher future target value relative to today. If the home-price index is below the target price at expiration, the homeowner snags a payment.

A simpler approach is to buy a put option on shares of home-builder stocks, which gives the owner the right to sell the stocks at a set future price. If the stock price falls, the put owner gets to pocket the difference between the current and the set put price.

Tap Low-Rate Mortgage

An alternate option involves tapping your home’s value via a home equity loan and redeploying those assets to either pay down relatively more expensive debt, or investing for a higher return. Given that home-equity loans average 4.6%, if you are paying more for credit card debt, it could be to your advantage to swap those payments. That said, volatility in the stock market underscores the risk in what is essentially using leverage to boost returns.

As some market observers wonder if we could be looking at the top of the housing market, homeowners may want to get creative to protect against declining valuations. Before proceeding, the best practice is to consider both costs and risks.

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