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87. SHORT SELLING
Short selling in financial markets is the practice of borrowing a security, usually a stock, and selling it in the market. The idea is to borrow and sell with the hopes of buying the security back, or covering, later at a lower price. It is done when you think the price of the security is too high. Note that short selling means something different in real estate (see #90 Foreclosure/Short Sale).
Short selling made the front pages during the height of the 2008–2009 market meltdown, when large hedge funds and short sellers drove down the prices of certain stocks, mostly in the financial sector. It was felt that short sellers “ganged up” on some of these stocks, creating an u
What You Should Know
In stock market parlance, “going long” means you are buying the security; by “going short” you effectively own a negative quantity of a security. You owe the security and will pay margin rates (see #86) to borrow it, with many of the same margin rules in effect. In normal practice, you borrow the security from a real lender, arranged behind the scenes through the broker network. The lender is entitled to receive any dividends that may accrue during the borrowing period, and of course, to receive the shares back once the short sale is covered.
Short selling is inherently risky. Why? Because a stock can only go to zero on the downside, but rise, theoretically, to infinity on the upside. If it rises “to infinity and beyond,” you’re liable for the entire amount of that rise from the price you shorted it at.
Most short sellers are knowledgeable and seasoned professionals who employ good risk-management techniques to control potential large losses. In recent years there has been a rash of “naked” shorting, where sellers sell shares they don’t borrow or have (sometimes such shares can be in short supply). Naked shorting probably exaggerated the slide during the financial crisis.
If a stock or other security is being sold short, that isn’t always a bad thing for investors in that stock. Active short selling does mean that some investors—probably pretty good ones—are betting against the stock. It also adds supply to the market, driving prices down. But all shares sold short must be bought back, or covered, eventually, so assuming your company isn’t going bankrupt, that demand will all come back to market sooner or later.
Why You Should Care
Short selling serves a useful purpose in allowing individual investors to bet against a stock or company. It also adds liquidity to the market, and prevents the market from rising beyond reality—it is sort of a check and balance on the markets.
Unless you’re a fairly active and knowledgeable investor, short selling probably won’t be in your bag of tricks. If you do sell short, you must choose wisely and be prepared to follow closely. When short selling becomes rampant in a market (not always easy to tell, for so-called short interest statistics are published only monthly), it’s a sign of a “bear,” or down, market. The reversal of a short selling pattern can be quite sharp to the upside, as short sellers rush to cover; this phenomenon is called a short squeeze. In sum, short selling isn’t for the faint of heart; neither is owning stocks that are short seller favorites.
88. MEDIAN HOME PRICE
If you’ve been reading along, we’ve covered about every financial and financial market topic except real estate. For this and the next three tips, real estate assumes center stage.
Real estate is both a commodity and an investment. As a commodity it serves a useful purpose, and its price reflects the laws of supply and demand. As an investment, it requires an upfront purchase to generate cash returns later, either as income or as a capital gain upon selling the property. If you own your own home, those “cash returns” come in the form of rent you don’t have to pay.
Real estate markets operate quite differently from other financial markets. As the saying goes, “all real estate markets are local.” Aside from real estate investment trusts (REITs) and other investment vehicles, each piece of property is unique, and its price is determined by the supply and demand in that local market, as those of you who have tried to buy beachfront property or a home in the most expensive neighborhood in town already know.
Still, like all markets, we need some kind of pricing benchmark—like a market index, a commodity futures price, or an exchange rate—to know where that market stands compared to its past, and to determine how affordable a certain property is. That’s where median home price enters the picture.
What You Should Know
Median home price is a statistics-based figure used to measure pricing in a given area. That area can be nationwide, regional, by state, by city, or even by neighborhood. For that geographic segment, the median home price means that half of the homes in a given area sold for more than the median price, and half of them sold for less.
If the national median price for single-family homes was $199,000 in mid-2013, that means that half of all of the single-family homes sold for more than $199,000 (think of those fancy mansions on the beach in Malibu), and half of them sold for less than $199,000 (think of the large numbers of modest homes in, say, St. Louis). That figure was over $230,000 in 2005 but dropped to $169,000 in 2009, so you can see how much the real estate market has fluctuated in recent years—and in many markets like Las Vegas and Phoenix it has fluctuated quite a bit more than that.
Median home prices are calculated by several agencies, the most prominent of which is the National Association of Realtors (NAR). The NAR publishes a quarterly list of Median Sales Price of Existing Single-Family Homes for Metropolitan Areas, with data stretching back to 1979. See www.realtor.org/topics/metropolitan-median-area-prices-and-affordability/data and other resources on that site.
Why You Should Care
Median home prices affect you as a homebuyer on a few levels. Of course, it is a quick read on the real estate market, and whether your home is worth more or less than it was, say, this time last year. Since medians are just that—medians—it’s important to look at median prices in your city, and better yet, in your neighborhood, to get an idea of your home’s worth.
You might also consider the varying regional median prices as a litmus test for where you can actually afford to live. While the national average as of mid-2013 is $199,000, you can look at prices, and the inventory and sales figures, which affect prices, in your city at the National Association of Realtors databank mentioned above. You can get median prices at your neighborhood level on Zillow (www.zillow.com).
89. HOUSING AFFORDABILITY
Can you, or anyone else, afford a home in your area or in another area you might be hoping to live in? Clearly that’s not an easy thing to figure out. Equally clearly, your ability to afford a home in a certain area is a function of your income, and the average incomes of those in that area. So to determine affordability, economists and real estate professionals take the median home price for any given area and compare it to the median income for the same area to determine whether or not the housing stock is actually affordable. Can the people who live and work there actually afford to buy what’s on the market?
What You Should Know