Real Estate Bubble

[Paddyboy1]

I hear more and more talk lately of a global real estate bubble. I read this morning that the amount of the asset devaluation since March 2000 has been fully offset by the increase in valuation of American real estate since that time period. wow. I think people may have been tricked into thinking that nominally low interest rates are lower in real terms than they actually are. How do I make a leveraged speculation on the bursting of this bubble? There has to be some kind of hedge I can use against rising real estate values, can anybody help me out?

[Dr T Non-Fan]

Since most property is unique, there can't be a standardized exchange for selling futures or forwards.

Choices from the last minute (plus current time typing) of thinking:
1. Don't own property.
2. Sell short MBSs
3. Bet on a rise in interest rates and subsequent drop in prepayments (and subsequent rise in interest cash flows from expected) by buying IO strips of MBSs.

Most of these will squeeze you if the burst doesn't happen soon enough.

[Paddyboy1]

I don't really want to bet on a chain of events leading to refinancing activity and I don't want to bet on interest rates. There is a standardized exchange where people hedge insured weather catastrophe risks and these risks globally vary only by like $10B a year. The real estate risks globally vary by maybe 1 million times as much. There has to be a more efficient hedge. Or even just a speculator's market, like there is for gold, or derivatives on a company worth a few billion. Again, we're talking about a market that must be in the tens of $trillions. Are there any really huge REITs that I can short?

[Dr T Non-Fan]

I only brought up the interest hedge since it's a major cause of the real estate bubble.
I'd think that any REIT on NYSE ("M-O-U-S-E") could be shorted through a broker. Unless I'm full of --it. ("Ayy, I am." - " great line from 'The Perfect Storm'.)

[Spectrum]

Don't forget - if you live in a bubble area, sell your leveraged (by the mortagage) house and rent an apartment. Wait for the crash and be patient for the bottom. Don't sign a lease for more than a year at a time to increase flexibility to re-enter market. Leverage yourself to the hilt at market bottom.

[Laocoön]

You should be able to do a search of REIT stocks on Hoover's or something similar. You probably want to deal with REITs that are highly leveraged, and for extra credit find some with low FFO/equity ratios ("FFO" is basically REIT for "cash flow"). Identify a few wounded stags, and short those puppies, or if you are even more bold, buy puts on them.

Note however that REITs tend to be valued based upon net rent flow rather than directly on the market value of underlying property, and there is likely a decent lag between real property going down in price and rentaly income following suit.

[Paddyboy1]

Okay, I think I found the one I want: EQR, the big REITs all seem to be hotels or other commercial industrial property, but this one is residential apartments. It trades for $8B on a book value of $5B. Stock jumped 10-15% over the past month, seemingly on the announcement of the size of their dividend, maybe the Fed meeting, I don't know. I don't understand why they are declaring a dividend and borrowing $300M, that makes me suspicious. I would think that the value of this company would track directly with residential real-estate values. The October 30 Puts are $1.90 and the stock trades at $29.67, this seems kind of cheap considering it has gone from over 29 to under 26 back to over 30 already in the last few months. I'll give it a try.

[Laocoön]

PB: You don't want one. Try to find at least three. Look at ASN, AIV, AVB if you want apartment building owners. (None of these are optionable.)

[The Diabolical Biz Markie]

I hear more and more talk lately of a global real estate bubble. I read this morning that the amount of the asset devaluation since March 2000 has been fully offset by the increase in valuation of American real estate since that time period. wow. I think people may have been tricked into thinking that nominally low interest rates are lower in real terms than they actually are. How do I make a leveraged speculation on the bursting of this bubble? There has to be some kind of hedge I can use against rising real estate values, can anybody help me out?

Do you have any sources on this? Links? Does it say if it's mostly residential or commercial?

It doesn't surprise me, but I'd like to see where it came from--this may change my thinking on some issues (like selling my house).

Buying puts, or just shorting, REITs is probably the way to go. Many MBSs come with guarantees (actually, I think they all do) so that is not an efficient hedge.

Other people you could short would be businesses that rely on real estate transactions exclusively. Mortgage Insurers for example. Their revenue should, in theory, collapse, and at the same time, this would preciptate an increase in losses. Real Estate companies (if there are any large public ones).

Or course, banks and mortgage brokers would be another good set of potential shorts because they depend on real estate. (my working theory is that when the bubble collapses, not only will prices plummet, but there will be MUCH fewer transactions...it generally works that way with stocks, so it might work with real estate).

[The Diabolical Biz Markie]

BTW, this would make sense, given the money supply/credit expansion we've seen. Basically, there has been TONS of growth in the money supply, in part due to Alan Greenspan's easy money policy. That money has to go somewhere--because it isn't all covered by increased production. (going back to the basic PY=MV equation).

Normally, you'd expect to see it show up in inflated general prices, but it seemed to go first into stocks and now into real estate.

That makes sense. SOME prices had to up with all that excess $$$ floating around.

[Paddyboy1]

This article talks about the bubble, and offers the same low-interest rate explanation. It also notes that prices have risen more in real terms over the last 5 years in the US than in any other 5-year period in history.

http://www.economist.com/displayStory.cfm?Story_ID=1057057

[The Diabolical Biz Markie]

http://www.stls.frb.org/fred/data/monetary/m3sl

This is the growth of M3 which is the most inclusive of the definitions of "money". As you can see, growth has been pretty healthy (or unhealthy depending on your view of things...)