Time to Short the Housing Market?

If you missed out on leaving the city and buying a house in the country in 2000 or 2001, you have likely been kicking yourself ever since. Without even glancing at statistics, anecdotally anyone reading this knows friends and relatives who have seen their pandemic-era real estate investment soar. But the times are a-changing, and as housing construction and purchases begin to wane, investors locked out of the pandemic lockdown housing bubble might be able to cash in by shorting housing stocks.

Housing Prices Are Out of Control

A 2021 Pew Research study showed that more than 50% of Americans list affordable housing—or rather, the lack thereof—as a "major" problem. This isn't particularly surprising considering that housing costs have skyrocketed over the past decades—and it's getting worse. Americans can now expect another 11% jump in home prices, according to estimates from the National Association of Realtors. Currently, the average home in the U.S. is worth over seven years' salary, up from 3.5 in the early1980s. This is untenable, and now may be the time to bet against the housing market.

The Turning Tide

When the housing market looks to be on shaky foundation, the first bellwether investors need to pay attention to is the slowdown in home building and new construction. In a recent earnings call, CEO of KB Home KBH Jeffrey Mezger, stated: "Many prospective buyers have paused and moved to the sidelines amid higher mortgage rates, along with ongoing inflation and a range of macroeconomic and geopolitical concerns."

That stock, a pandemic-era buy that I had previously recommended, has fallen precipitously both as a result of the broader market decline and as a result of less than rosy guidance. The company posted guidance of $2 billion revenue, $350 million lower than Street estimated. KB Home have now lost 37% year to date, this stock has further to fall. I suggest buying an options put and picking up some shares as a hedge after another 10% to 15% decline and hold long-term. At $28.46 per share, the stock is now lower than it was in February 2020 before the March crash. I suspect the stock will fall close to the $20 per share range when all is said and done.

Another way to bet against the housing market I buy ProShares Short Real Estate (REK), an inverse ETF that corresponds to the inverse of the daily performance of the Dow Jones Real Estate Index. However, investors need to be aware that these kinds of investments are highly volatile. I suggest allocating only a very small slice of your portfolio and keep a watchful eye on its performance.

And then there is fintech. So many fintech housing stocks are out there but there is one that may have put itself in a precarious spot: Rocket Companies RKT.

The online fintech company has experienced phenomenal growth and success in the booming housing market over the past few years, surpassing banking giant Wells Fargo WFC in 2018 as the United States' largest mortgage writer.

But while writing mortgages pays well in good times, should the bubble burst as bad as some experts believe it could, Rocket could not only fall back to Earth, but could find itself buried under an avalanche of mortgage defaults. Just how leveraged is RKT?  Well, Lehman Brothers (remember them?), has a lower debt-to-equity ratio than Rocket does currently. While I do not expect a 2008 level crash, any small decrease in assets for a company like this could spell bad news for its stock—and good news for those betting against it and the housing market more generally.