What are some of the best ways to profit from a crash in housing prices, if one occurs? Should I short the Homebuilders? Should a buy puts on them? What are some other strategies I'm missing?
It is very unlikely that a major deflation in housing prices will occur on a national basis. It has never happened in my lifetime. It can sometimes happen in small regions, because housing prices usually reflect regional circumstances. But not to the extent that it would impact national public corporations in a big way.
If housing crashes big there will be a devastating depression and all stocks will be good shorts. Everyone who bought homes in the last 3 years (record number of home buyers) with 5% downpayment will be near bankrupt. There is no telling what kind of excesses exist in the mortgage markets thanks to greenie's experiment with 3.5% ARMS. Throw a dart at the WSJ. Every stock would be a good short under your scenario. Accept for maybe a gold stock or chinese internet (LOL). No way this could happen before late 2005 or 2006 though without some kinda disaster.
The banks will be overburdened with delinquent mortgages and foreclosures. At first they try to pop properties off for close to market value but at some point the government will start pressuring them to clean house. The process takes a few years. At this point they will sign over properties to anyone that has good credit and shows some RE experience. Very often no downplay is required. Also at times they auction off delinquent loans on commercial properties. I know of one owner who got into a skirmish with the lender over some issue and stopped paying. The loan went delinquent and got auctioned. No one really qualified but the owner's attorney showed up and the owner picked up the twenty million plus loan on his building loan for 5 mil. We are not talking about distressed property here. The building was full of tenants and it's located on fifth Ave. To further illustrate the possibilities: in 1986 or 1987 one could have have purchased three distressed 8 family buildings for 800-900K in a community across the river from Manhattan. Good price at that time by everyone's opinion. There was the crash in 87 and the market bottomed in 1992. Just at that time large operator picked up an 8 story warehouse the size of a CITY BLOCK yards form the Hudson River and views of Manhattan for 850K. A good game plan would be to team up with an experienced person, create a limited partnership and pick up some pieces when the time comes. Since I have lived through a couple of cycles I can see the signposts. The cockiness of landlords and RE people at the moment is a sure sign of a top.
Is shorting stocks the only way to profit from the decline, or are there any other vechicles through which a person can potentially profit from a crash in housing?
as long as rate remain low, housing crash unlikely and the industry continue to roll out diff products to keep the good time going http://www.credithomemortgage.com/CODI.htm
Well, to short the housing market - I am not sure how to do that it is so large and manifold. You could short homebuilders, short home imrovement chains, short banks and mortgage brokers mortgage originators, Fannie Mae, Freddi Mac, Short the REITs that have too much residential in thier portfolio. You speak as though a crash is a foregone conclusion. I will short the homebuilders when they reach a cycle peak. Not sure when that will be. Stayed tuned to my journal though. The recent article on soft rents in cities seems to be a interpreted as a harbinger for the rest of the residential market. But this softness - overcapacity - is due to low rates and the record increases in homebuying. A Housing crash - or more likely a cycle downturn will take place only after rates rise enough to stifle home purchases. The predictions for a crash based on bankruptcy, job loss, etc. is wild speculation I feel. Job market is beginning its post recession recovery. Doomsayers always think the next extinction is just moments away - even after those moments have passed uneventfully. Robert SHiller believes housing prices won't crash, but recede in certain hot markets, like NYC, Chicago, Miami, LA, Hamptons.
Well, I don't mind listening to you debate whether or not the housing market will crash, but I started this thread to figure out if anyone was actually positioning themselves for a crash, and if so, how. Sounds like not too many people hold bearish positions w/regards to the housing market.