Let’s say you fear housing prices are bound to fall but you still want to own. Is there any other way to protect yourself? Here’s one unorthodox idea I got in an email today from David Brady, an investment adviser in Chicago (Brady Investment Counsel LLC):
…the true financial geek looking to buy and hedge from a potential decline in prices may want buy the house today and short Countrywide Financial (CCR-$36), a mortgage lending leader. Or better yet, short a publicly traded bank with operating profits very concentrated in the … mortgage lending and residential real estate markets [where you live]. If the residential real estate market continues to run, your RE investment works great but you lose it all on your short. If the RE market gets cracked, the short works and you lose on the RE.
Interesting, Mr. Brady, even though I see a couple of problems. The biggest one is that shorting stocks can be kind of expensive. It wouldn’t be reasonable to keep a short position for years, which is how long it might take for a real estate bubble to burst. It’s also not exactly a solution for everyone, since on a national basis the potential losses from real estate dwarf the potential gains from shorting mortgage lenders.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.