The housing market is very interesting, volatile and rewarding for those investors who make the right decision. However, you might have heard about shorting the housing market but what does it mean?
Risk is all around us and found throughout all walks of life. Whether you’re a gambler looking to bet on sports at fully licensed US betting sites found on OddsIndex or are looking to try your hand at real estate for the first time, understanding the risk involved is crucial to making the best decisions.
If we use shares of stocks as a general example, where shorting is involved, you borrow shares of stocks from someone while promising to return them by an agreed date. You then sell the shares for cash. Then you wait until the stock drops in value, enabling you to rebuy the stock which will then enable you to replace the shares you borrowed.
Essentially, this will allow you to buy the shares at a lower price than you sold them for, making it possible to keep the difference. However, the risk is where prices rise in which case, you will lose money.
When it comes to shorting the housing market, it is based on hoping that home prices drop. This is done by investors trading real estate investment trusts (REITs) as well as shares with those companies that operate within the real estate industry.
So, if house prices do drop, those short sellers will see that the REITs and company shares will drop in value, this means that they will benefit.
Successfully Shorting the Real Estate Market, the Benefits and the Risks
Predicting that house prices will drop is not enough to successfully short real estate. It is also about identifying any potential issues that will result in house prices dropping. This causes an overvaluation of real estate assets.
One of the main benefits of shorting the housing market is that you are going against the flow of the market. This means that when things go in your favor, you usually see significant returns.
There are many risks though and that can include experiencing unlimited losses as the underlying asset could increase to exponential levels. There is also a situation known as short squeezes where the asset value rises, forcing other short sellers to sell their position. This causes the investment price to rise higher.
How to Short Real Estate – Four Ways
Shorting a REIT
One of the most common ways of speculating on the housing market is to invest in a REIT. In the same way as they can stock, Investors can identify a broker who is willing to loan them shares. However, it is also possible to invest in contracts for differences which will enable investors to spread their bets, enabling them to speculate on increases and decreases in prices of REITs.
Shorting Individual Real Estate Stocks
Investors can opt to short the stocks of individual companies that operate in or close to the real estate industry. In many cases, these stocks are seen as an insight into the performance of the housing market overall. This is because the labor and commodities used within the industries will have a direct impact on the price of homes.
Shorting a Real Estate Exchange-Traded Fund (ETF)
An Exchange-traded Fund (ETF) is a collection of securities such as a REIT and so, it will follow a certain index. If you take this option, then you are betting that an ETF will drop in price.
So, when the housing market loses strength and declines, it will mean that ETFs will drop in value because the assets included in the fund will also drop in value.
Holding a Long Position on an Inverse ETF
It’s important to bear in mind that ETFs are designed for shorting real estate. As the name suggests, the funds will increase in value when the housing market declines and drops in value.
So, if you want to take the traditional approach to shorting an inverse ETF, you will need to take a reverse approach to the usual approach. This means that you will need to hold your position for a longer period. If you opted to take a short position then you will be betting that there will be an increase in house prices.
Conclusion
Shorting is a risky approach but when it is done correctly, you can see solid returns. You will need to carry out your research on the assets that you want to short and you will need to have an understanding of the real estate market. Only then will you be ready to take the next step.