Sun, 12 Mar 2006
Patrick wants to short
the housing market. This is something I've thought about over the past
year or so.
I could short builders, mortgage banks, or Fannie Mae, but that's not exactly
the same, and I'm not as confident they will fall.
I'm not sure why he doesn't want to take a short position in equities that are
likely to track housing prices. If prices start to fall it'll likely be
because people are defaulting on their mortgages. This will negatively impact
those holding mortages, i.e. banks, Fannie Mae and Freddie Mac. As Greenspan pointed out,
the GSEs are holding onto lots of mortgages.
I read How
to Profit from the Coming Real Estate Bust yesterday, and the author, John
Rubino, suggests a number of ways to make money when the euphoria ends. He, of
course, suggests shorting the GSEs, banks, and builders. But the housing
market doesn't exist in a bubble (pun intended). The fall in housing prices
is likely to correspond to a fall in the dollar. It is foreign investment in
dollar debt that is helping to keep interest rates low. When foreigners get
tired of financing American consumers, and not making much money doing so,
they'll take their money elsewhere causing the dollar to fall. (Yes, I realize
it's not that simple. Foreign governments also want to keep their exports
affordable.) To get them back, we have to offer higher returns, i.e. higher
interest rates, on their investments. Higher interest rates make for grumpy
homeowners with ARMs, over half
of recent home buyers. For a thorough discussion of the problems ahead for
the dollar, check out The
Dollar Crisis: Causes, Consequences, Cures. Rubino thinks Swiss Francs are
the way to go. I'm not sure of that. I have money in Yen and Canadian Dollars
right now. Subscribe to Chuck Butler's Daily Pfennig for daily commentary on
foreign currencies.
Gold and other precious metals are another way to make money from a falling
dollar.
Some more directly housing related stocks to short are those of title insurers,
appliance and furniture manufacturers, property development companies and
REITs. He also suggests going long apartment REITs and health care REITs.
Apartments should do well, but I'd be more wary of the latter. REITs that own
nursing homes should do OK, but I'd be hesitant to invest in hospitals which
seem to be closing with increasing frequency as doctors are required to provide
services to people who don't pay their bills.
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