Personal Residence as Substitute for TIPS

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Personal Residence as Substitute for TIPS

Postby Bustoff » Sun Feb 10, 2013 10:03 am

I want some inflation protection but I'm convinced I will never be able to fully understand TIPS.

So, as we have been considering moving to a warmer climate, I am seriously considering taking the capital I had reserved for a TIPS allocation and using it instead to cover the purchase of a condo in Florida along with the ongoing cost of condo fees.
Part of my rational is that a personal residence is at least providing a real value regardless of what happens with inflation or interest rates.
If we bought a condo in Florida, I'm told the condo fees alone could run $500 a month.
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Re: Personal Residence as Substitute for TIPS

Postby Userdc » Sun Feb 10, 2013 10:12 am

Real estate can provide inflation protection and can also be an excellent tax shelter.

But it's also far riskier than treasuries, so I wouldn't view it as a replacement for TIPS.
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Re: Personal Residence as Substitute for TIPS

Postby nisiprius » Sun Feb 10, 2013 11:45 am

A personal residence as a hedge against inflation is a sales pitch by realtors and I think it's nonsense. To begin with, here is a chart of the value of real estate in the Herengracht district of Amsterdam over four centuries, which I think might be the longest-term financial data series ever obtained:
Image
Notice that the long term real return is on the rough order of zero, and that no matter how long an interval you take it is influenced enormously by the choice of starting points. And notice that the required "holding times" are long; after 1780 the value collapsed and stayed down for a century.

Of course people might remember 2006 in the U.S., too.

The other problem with a personal residence is that it is shelter. It isn't an investment. In addition to being a wildly speculative asset that undergoes sharp fluctuations, it's illiquid by its nature, but is extra illiquid because you are living in it. You can't rebalance it. You can't sell just a few shares of it (and buy a few shares in another house across town). If you think a $7.95 commission to sell an ETF is bad, or get annoyed at the 24 hours it takes to sell a mutual fund, compare it to the months it takes to sell a house, the realtor's commission, and the cost of moving.

And, no, absolutely not, a second mortgage or HELOC is not equivalent to selling part of it--the bank has not become a business partner with you. You owe the bank a specific number of dollars, not 10% of the value of your house. The number of dollars stays the same even if the house drops in value. Again, recent history should make clear the danger of that thinking.

Meanwhile, in my opinion the mystery of TIPS is a smokescreen put up by people who don't make money when you buy them. What an individual TIPS does is dead simple, and if you buy at auction and hold to maturity there is no mystery about them at all. The market price of TIPS is a mystery of course, but so is the market price of anything. However, if you don't like TIPS because you (somehow) feel you can understand the market fluctuations of a stock or a junk bond but not a TIPS, then the obvious alternative is series I savings bonds, which are free from market risk.
Last edited by nisiprius on Sun Feb 10, 2013 11:49 am, edited 2 times in total.
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Re: Personal Residence as Substitute for TIPS

Postby camper » Sun Feb 10, 2013 11:47 am

Apples and oranges. Real estate adds much more risk.
How do you rebalance a personal residence?
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Re: Personal Residence as Substitute for TIPS

Postby Valuethinker » Sun Feb 10, 2013 2:19 pm

Bustoff wrote:I want some inflation protection but I'm convinced I will never be able to fully understand TIPS.

So, as we have been considering moving to a warmer climate, I am seriously considering taking the capital I had reserved for a TIPS allocation and using it instead to cover the purchase of a condo in Florida along with the ongoing cost of condo fees.
Part of my rational is that a personal residence is at least providing a real value regardless of what happens with inflation or interest rates.
If we bought a condo in Florida, I'm told the condo fees alone could run $500 a month.


Houses are not inflation protection-- too much specific risk.

Take a look at an apartment in Greenwich Village, NYC, vs. a 4 bedroom Victorian Row house in Buffalo, NY, between 1950-2012 say. Look at that same house in Cabbagetown (Parliament Street) in Toronto 1950-2012.

My bet? NYC apartment x 200 in value (at least)

Toronto Cabbagetown x 80

Buffalo? x 25 if you are lucky

Long term fixed rate mortgages are an inflation hedge-- you are paying back the lender in devalued dollars.
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Re: Personal Residence as Substitute for TIPS

Postby Bustoff » Sun Feb 10, 2013 2:59 pm

Thank you nisiprius and Valuethinker.
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Re: Personal Residence as Substitute for TIPS

Postby Bustoff » Sun Feb 10, 2013 3:17 pm

Valuethinker wrote:Long term fixed rate mortgages are an inflation hedge-- you are paying back the lender in devalued dollars.


It occurs to me there must be millions of homeowners still underwater but getting little comfort paying their mortgage lender in devalued dollars.
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