Forever immortalized in the film The Big Short, hedge fund manager Michael Burry made a bold move against the real estate bubble of the mid-2000s, bringing to light mechanisms that facilitate profitability from disaster. Just over a decade later, retail investors are now wondering for themselves how to short the housing market.
Fundamentally, there’s a lot more going on with bearish sentiment toward residential real estate than merely copycatting a glamorized financial protocol. While myriad experts have forecasted that demand for home acquisitions will stay relatively strong, such opinions run the risk of conflicts of interest. Namely, investors should be careful about accepting guidance from professionals whose livelihood is inextricably linked to booming home sales.
Combine this dilemma with brewing recession fears – largely stemming from blistering inflation – and it’s understandable why some investors are skeptical about the real estate hike.
To take the next step and actually short the housing market, here are three high-risk, high-reward avenues to consider.
Short the Housing Market Through Shorting Stocks
Arguably the most straightforward way to short the housing market is to initiate bearish positions against publicly traded companies that are tied to the real estate sector, such as brokerage services Redfin (NASDAQ:RDFN) and Zillow (NASDAQ:Z, NASDAQ:ZG), or homebuilders D.R. Horton (NYSE:DHI) or KB Home (NYSE:KBH).
Interestingly, all four stocks are down big on a year-to-date basis. This contradicts the notion that the real estate market is merely taking a breather and not suffering a correction.
For those taking this approach, investors have two basic avenues. First, they can purchase put options, which rise in value as the underlying security prints red ink in the stock market. Second, investors can directly short stocks. This involves borrowing shares, selling them in the open market and profiting from the difference if those shares decline in value and once the securities lender is made whole.
However, please note that your losses are unlimited if the underlying security moves up and against your short position.
Going Long an Inverse ETF
One of the beauties of exchange-traded funds (ETFs) is that they provide a basket of securities under one umbrella. Therefore, investors who prefer to bank on market themes rather than individual names find significant value in this platform.
However, ETFs are also very flexible, with many funds featuring inverse profiles. Essentially, inverse ETFs rise in value when a targeted benchmark index sheds basis points. Therefore, by purchasing this special class of investment in the real estate arena, you effectively short the housing market (even though technically you are “long” the position).
Shorting a REIT
For many people, investing directly in real estate is often out of the question because of the amount of capital necessary. However, a special financial vehicle called real estate investment trusts (or REITs) help fill this opportunity gap. REITs are companies that buy income-producing real estate. Therefore, by collectively pulling capital together, individual retail investors can profit without forwarding extensive funds.
Unfortunately, for those who want to short the housing market, many brokers are not willing to lend out shares. As an alternative, investors can trade contracts for differences (CFDs), which effectively represents wagers on price trajectories of REITs without involving the underlying assets themselves.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
