Thursday, September 15, 2005

Betting Against the Bubble

An interesting story about how short-position stock traders are looking to beat the housing bubble when it bursts. Here's an excerpt from reporter Scott Malone of Reuters:
NEW YORK, Sept 15 (Reuters) - Bearish stock investors are looking at the bubbling U.S. housing market and developing short strategies to cash in should real estate prices drop.

Their main prey is the mortgage lenders who have made it possible for new buyers to bear higher house prices and for people who already own their homes to cash out appreciated value through second mortgages.

"There is a mortgage-finance bubble and it has created a housing bubble," said David Tice, portfolio manager at the Prudent Bear Fund, a mutual fund that takes short positions in stocks. "The whole economy is at risk when the housing bubble slows down ... What's underappreciated is the fact that this (house price) appreciation has allowed people to use their homes as ATM machines in order to take cash out in order to overcome modest income growth to keep spending."

Average U.S. home prices have surged more than 13 percent over the past year, the largest 12-month gain in more than 25 years, according to government data released late last month.

Many real-estate related stocks have soared this year as the property market has boomed. The Dow Jones home builder index is up almost 25 percent so far this year, while the Morgan Stanley index of real estate investment trusts is up more than 10 percent. The broad Standard & Poor's 500 index is up 1.2 percent over the same period.

Short-sellers profit when stock prices decline. They borrow shares and sell them, hoping to buy them back later at a lower price and pocket the different.

Warren West, president of Greentree Brokerage Services, a Philadelphia-based company that advises on investment strategy, said: "There are a number of exchange-traded funds that are specific, regional or commercial, if people have an idea of shorting a particular part of the market."
Read the rest of the story at this link.

— The Boy in the Big Housing Bubble