Is a sharp correction in store for the real estate market?
Fannie Mae, the largest buyer of mortgages in the US, is
worried. They recently warned that the probability of a
housing bust has risen sharply in certain parts of the
country.
Fannie Mae and Freddie Mac financed about 43% of new home
mortgages last year. That's down from 53% the year before.
Fannie and Freddie only buy "conforming loans" In these
days of easy money and competition for borrowers... more
lenders are selling mortgages to non-government sponsored
loan buying companies. They have less stringent lending
standards. That means more risk as it allows home buyers
with poor credit records or unconfirmed income to qualify
for mortgage loans.
Listen to this! 24% of the sub-prime loans sold to
non-conforming buyers in 2004 were adjustable rate mortgages
with an interest only feature. And... these mortgages are not
restricted to less expensive houses. The share of jumbo
mortgages loans ($359,650 & up) accepted without full
documentation increased from 27% in 2001 to 51% in 2004.
Fannie Mae warns that the real estate collapse of the late
1980s was preceded by similar patterns.
Some point out that the real estate bubble is effecting
value in just certain areas. But they don't understand that
just 22 of the most expensive metropolitan markets in the
U.S. account for 35% of the total value of the country's
residential real estate.
If those markets begin to collapse they will shock real
estate values everywhere.
What should you do if you are sitting on fat real estate
capital gains. First... make plans now. Once a
correction (crash) begins you will have a hard time getting
out of your property. Values plunge and buyers disappear.
If you don't believe there will be more than a little dip
in real estate appreciation and you want to hold on to your
property... here's an idea. Use the stock market as
insurance. How do you do that?
Find real estate stocks and do short selling. Well managed
this can be an effective strategy.
If real estate values continue to climb you still own your
property and continue to accumulate capital gains.
If real estate values begin to fall you sell short selected
stocks and profit from the decline, which balances the loss
in the value of your real estate. You protect your real
estate gain... and maybe even come out ahead on the
strategy.
An ETF is an Exchange Traded Fund. That's a basket of
stocks that trade under one symbol just like a stock. You
can quickly buy, sell or short an ETF through an online
broker in seconds. You have instant liquidly... something
you don't have with real estate.
Two ETF's that you could be ready to short sell would be:
IYR - A basket of real estate stocks
IYF - A basket of financial stocks.
Lots of areas would be hard hit by a down turn in real
estate including: banks, mortgage lenders, utility
companies, materials suppliers and especially home
builders.
The stocks of leading home builders that would suffer
during a real estate bust include:
Brookfield Homes - BHS;
Beazer Homse - BZH;
Centex Corp - CTX;
D R Horton - DHI;
K B Home - KBH
Yes, short selling is a radical strategy for the smaller real estate investor, but aren't you the one who needs the gain
protection the most?
You may find a local stock broker that would give you
some help, but you should understand some basics about the
stock market and trend following.
You can easily learn that here... http://digbig.com/4dxys
Mark Walters is an investor-entrepreneur helping other investors from his Web pages at
http://www.Lease-Option-Sub2.com