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Housing market seemingly in ‘free fall’ – how to short it?

Housing market seemingly in ‘free fall’ - how to short it
Dino
Kurbegovic
4 weeks ago
3 mins read

Since the start of the pandemic, one of the strongest sectors of the U.S. economy was the housing market. However, like most other sectors, housing is now showing signs of slowing and is increasingly worrying those looking to invest in real estate.

Namely, housing starts decreased in June for the third month in a row as the markets seemingly cooled, possibly a reaction to everything that has been happening in the markets. The lingering chance of a recession, increased rates, and announcements by the Federal Reserve (Fed) of more hikes have caused both buyers and builders to pause.

Investors reminiscent of the great housing crash in 2008 and the failure of mortgage-backed securities (MBS); thus, may be looking to short the market. Michael Burry, who has foreseen the initial housing crash has allegedly tweeted on July 20, that the housing market is in ‘free fall’ and that investors can short the market.  

One of the ways to short the U.S. housing markets is through inverse exchange-traded funds (inverse ETF), which in essence provide short exposure to the securities tracked by the Dow Jones U.S. Real Estate Index or the MSCI US IMI Real Estate Index.  

ProShares Short Real Estate (NYSE: REK)

REK is an inverse ETF, which offers daily short exposure to the Dow Jones U.S. Real Estate Index, corresponding to the inverse (-1x) of the daily performance of the Index. Further, this ETF is designed to track the performance of real estate investment trusts (REITs), as well as other companies that invest directly in real estate. 

Year-to-date (YTD) REK is up over 17%, with both the long-term and short-trends remaining positive. In the last month, REK has traded between the $18.60 and $20.21 range, creating support at $17.28 and a resistance zone between $19.01 and $19.34.

REK 20-50-200 SMA lines chart. Source. Finviz.com data. See more stocks here.

As Finbold previously noted, following the home builder stocks drop on June 16, softening demand seems to be pushing the housing market into a downturn.

With such a backdrop, treasury yields are rising as well as borrowing costs for the end consumers thus creating a vicious circle for the housing market, which seemingly went soft overnight.

Finally, inverse ETFs can also do well in a bear market, although,  on the other hand, the risk is much greater compared to non-inverse ETFs, as the former employ complex financial instruments like derivatives and index swaps to provide short exposure. 

If the housing market continues declining, inverse ETFs should do well; however, investors looking to get short exposure need to gauge their risk appetites as the results can be volatile. 

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Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk. 

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