How to Short a House

One of the comments that came up repeatedly on the Housing is Not a Bubble column was the assertion that "You cannot short a house." As in the stock market, the lack of "informed short selling pressure" removed a source of supply that theoretically) would dampen price rises.

Only now, it turns out to be no longer true.

Michael Covel, author of Trend Following, points us to Hedge Street, where you can select distinct cities to short median home prices on a regional basis:

Los Angeles
New York
San Diego
San Francisco

These new Housing Price "Hedgelets" are benchmarked against the National Association of Realtors reported median sales price of existing single-family homes in the cities mentioned above. There’s also a hedge which can be put on on 1-yr ARM or 30-yr FRM Mortgage.

So now you can sell a region of Homes short . . .  just not individual houses.

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  1. fatbear commented on Jun 2

    The hedgelet requires you to trust the NAR figures – I would rather not risk my money on Realtors laying it out like it is. My bet would be there’s a bias in their figures, and that they go up easy while being sticky on the way back down. Remember that foreclosures are not reflected in their numbers until sold by the new holder, and reflect back to the S&L crisis as to how long REO stays unsold.

  2. zgveritas commented on Jun 2

    Nice catch on the Real Estate hedgelets. I know Todd Harrison has been looking for a way to short Hamptons housing for a while.

    The problem with these options as I see it is that they are only available for Aug and Nov 05. If I was going to make such a hedge I would prefer to have a longer LEAP-like timeframe.

  3. kent commented on Jun 2

    Hasn’t the CME been thinking about a real estate contract? Here’s part of a press release:

    CHICAGO, Dec. 3, 2004 – CME, the largest futures exchange in the U.S., today announced it has executed a Letter of Intent with MACRO Securities Research, LLC (MSR), a financial innovations firm dedicated to the creation of instruments designed to unlock liquidity in new asset classes, to explore the development of derivatives based on the Fiserv, CSW, (CSW) family of Housing Price Indexes (HPI). These derivatives would create a market that ultimately will, for the first time, provide homeowners with tools to help them protect the value of their largest asset.

    The CSW indexes are widely recognized as the most authoritative Home Price Indexes for tracking home price trends, and are used by some of the country’s largest lenders for loan originations as well as various types of mortgage analysis. MSR owns the exclusive rights to develop financial products based on the CSW Indexes.

    Or, is this something else?

  4. realtybaron commented on Jun 2

    MACROs are the brainchild of Robert Shiller and Allan Weiss. They’re suppose to start trading later this summer.

    Hedgestreet is independent of MACROs. I saw Hedgestreet on CNBC last year for the first time. Shortly after the MACROs press release through, the real estate contracts on Hedgestreet disappeared. Now, their back as ‘Housing Prices’.

  5. Financial Rounds commented on Jun 2

    Short-Selling Real Estate (via The Big picture)

    It’s been argued that the inability to short-sell residential real estate could be one of the factors that differentiate real estate bubbles from stock market bubbles. Not any more. The Chicago Mercantile Exchange (CME) already has a letter of intent…

  6. Bill commented on Jun 2

    Take a look at the spreads !

  7. Logan commented on Jun 3

    Early (’97) in the tech bubble, I was shorting some irrationally exuberant profitless wonders and taking it in the shorts (sorry for the pun). By the time the real meltdown occured I was gun shy, and while I didn’t lose anything I didn’t make money on an event I knew would happen. This time, this bubble (real estate), I’m determined to get it right. I know I can’t predict the timing of the burst, but want to assemble a set of leading indicators to trigger placing positions, and a pre-determined set of positions. Here are a few ideas on positions, I’m very interested in reader comments on the best strategies:

    * Shorts/Puts on mortgage insurance firms
    * Shorts/Puts on mortgage loan originators (e.g. Countrywide)
    * Shorts/Puts on mortgage loan financiers (e.g. Fannie)
    * Shorts/Puts on developers
    * Shorts/Puts on building supply firms
    * Shorts on ETF’s such as iShares Dow Jones Realty
    * Go long on rental real estate

    Recent pricing of real estate related LEAP Puts suggested to me that they were too expensive given the uncertain timing of a decline. While I feel 90% sure there will be a decline in hot markets, it could easily happen 24+ months out. Each of the positions have some pros and cons. Developers for instance – most claim that their land purchase option and house purchase backlog “insulate” them from historical unsold inventory problems developers have had during downturns. Neverthless, if new home sales slow down, their revenue can’t help but go down, unsold inventory or not. With a decrease in revenue will come a decrease in incomes and stock price. Many developers have had tech stock type run ups in the last few years on the backs of record sales, while their P/E’s are still fairly rational. Shorting mortgage originators is a similar play – they may not get stuck with defaults but will suffer loss of revenue due to smaller and fewer new mortgages being issued. Shorting mortgage insurers is betting on the hope that the default rate will rise dramatically, which it might, or maybe not.

    The data I’ve seen suggests that housing demand in many hot markets is the product of both speculation and secular immigration, demographic, and migration trends. Given that, we may just see a shift in demand from buying to renting, driving up rental prices which have been stagnating the last 5 years – so go buy an apartment building that all the broke real estate speculators can live in ;-)

    Anyone have any other ideas or analysis?

  8. RP commented on Jun 3

    Logan – a lot of folks would argue that shorting exacerbates the bubble, and it won’t pop until the shorts finally stop trying.

  9. Ugly Chart commented on Jun 3

    Ugly Picks

    Good morning, my name is Ugly, and I am a loser. I have it in me to do serious financial damage to my account. Dear Diary, SHLD continues to do its thing. WFMI and URBN both also had strong moves…

  10. Logan commented on Jun 3

    Shorting an asset while it still has upward momentum only adds to the momentum when the shorts have to exit their positions. And yes, its true that bubbles often push all but the most determined shorts out – its when there’s no one left to buy anymore that the momentum reverses. Knowing all that, its still possible to make money on a short if your timing is not too much off the mark. Clearly now is not the right time to short real estate, but that time will come.

  11. _o_________ ___ _______ commented on Jun 3

    Shorting Real Estate

    It looks like we’re one step closer to being able to short real estate.
    There’s a company called HedgeStreet (Via The
    Big Picture) which allows trading futures on housing prices and mortgage
    rates. It’s not quite the same as shorting a house as there’s

  12. dsquared commented on Jun 6

    This is not a genuine way of “shorting” the house though, is it? It’s not like a derivative where buying a put sets in place a series of hedging transactions which have the effect of making someone sell the underlying.

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