January 20, 2006 at 7:49 PM #6349
Referring to Rich’s posting re: increse in mortgage and property tax defaults, does anyone know of a way to profit from it ?
I remember reading something about buying property liens but can’t exactly remember the logic behind it.
LewisJanuary 21, 2006 at 9:24 AM #23349
I wonder about this also. I know foreclosures can be a bargain, but with prices so much further to fall, this won’t be a good time to get a foreclosure. Perhaps if you really know what you’re doing, you can still make money on a very good foreclosure despite a declining market.
I’ve requested info from ProFunds Short Real Estate fund, which invests in companies opposite of those held in the Real Estate Index; I wanted to find out what companies they invest in and it’s not in their prospectus, so I’m waiting for them to mail me their annual report.
Of course, if you own a house, you can sell it.
Is there a way to make money on the companies that hold 1st trust deeds? They are offering 12 – 16% APY for investors buying 1st trust deeds, but as their borrowers default, they won’t be able to absorb the losses and they will go under, too. Perhaps some of them are publicly traded and can be shorted. I just read about Residential Capital, Mercury Capital, CA Loan Servicing.
In the meantime, I’m putting the money from the sale of my house into a 4.5% 4month CD. Anything paying a higher rate has a risk of loss of principal, and I didn’t sell my dream house with a magazine worthy kitchen, just to lose it all chasing a higher yield.
Keep us posted, leung_lewis. You are an inquisitive person, and I hope to learn more from you.January 21, 2006 at 5:42 PM #23350
Thanks powayseller. I also looked into shorting REITs and stocks of property developers, home depot etc but decided there are too many other factors such as stock market sentiment, that could cause the correlation to go out of whack. Thanks for mentioning Profund though. I looked into their other stuff before and they usually just use futures on the short side. But the Short RE fund could be different and worth a look.
Let’s keep each other posted and continue to share info.
LewisJanuary 21, 2006 at 6:14 PM #23351
Profund Short Real Estate Fund
Powayseller, as suspected this fund shorts property-related stocks and REITs by shorting the constituents of Dow Jones US Real Estate Index (see http://www.djindexes.com/mdsidx/index.cfm?event=showComponentWeights&rptsymbol=DJUSRE&sitemapid=1). I agree that this is one approach but my issue is I think we both agree that residential property prices in SD (and most of So Cal) is poised for a correction. But what about the rest of the country (I don’t know but I can’t imagine the same case for Iowa) and commercial real estates ? Plus a lot of the REITs included in the index may be mortgage REITs rather than equity REITs and mortgage REITs may have a lower correlation with property prices (actually I don’t know enough about commercial REs and mortgage REITs to say yes or no).
If you check out the index’s performance (http://finance.yahoo.com/q/bc?s=IYR&t=my), you’d notice an interesting fact that from ’01 to ’03 the index went nowhere, and that didn’t correspond to what we know of as the start of the boom of the property market. Fear is therefore if there’s a lagging effect between property prices and property stocks / REIT prices then shorting stocks & REITs at this point may be a little too soon.
I guess my point is the advantage of Profund Short US RE Fund seems to be a good broad-based exposure to the inverse of property prices but there are other factors that need to be taken into consideration and it doesn’t seem “focused” enough for my taste at the moment.
LewisJanuary 21, 2006 at 10:46 PM #23352
I just reviewed the ProFunds SemiAnnual Report, and their report lists about 40 funds, but not any of their Short funds. It is impossible to get information on their holdings! Perhaps they just short the funds they hold in their regular Real Estate Sector Fund, which mimics the Dow Jones U.S. Real Estate Index. In any case, it seems like they don’t want anyone to know what their holdings are in that fund.
Have you checked my other tip, i.e. shorting companies which hold first deed trusts, or anyone else that is bound to go down when the foreclosures start? Subprime mortgage holders are vulnerable. Locally, since our economy is completely reliant on real estate and home equity withdrawal to fuel consumer spending, look for reduced profits at stores (although I’ll still be shopping at Coach), mortgage companies, escrow companies, construction companies, etc. To the extent we could short local companies, it could be a safe play. I’ve never shorted before, and I won’t buy any options. I’ve only bought stocks in the expectation of them going up, so this would be new for me.
What do you think about gold? I think people are crazy for buying gold. Historically, it’s very volatile, and the price can easily go in half again. It’s another bubble, isn’t it, and stocks/commodity bubbles can pop within hours. Too risky. Gold doesn’t underlie money anyway, so how is it a “safe haven”. How could I pay my rent with gold regardless of how deflated the $ becomes. I remember when gold was $250/oz, and what would prevent it from going there again? The gold bug web sites conveniently show the price of gold only from 2000, because that’s the time when it started its sustained upward trend.
Foreign currency CDs are risky, too. Too much potential downside with currency swings.January 23, 2006 at 5:08 PM #23353
Ha ha ha powayseller I am one of those crazy people who believe in gold; I’ve now got approximately 10% of my portfolio in gold and I will build on my foreign currency portfolio starting this year as soon as rates topped out.
All the above are actually ways to profit on one single theme: the fall of the USD. I believe that as rates stabilize, market attention will once again focus on the vulnerability of the USD (twin deficits, foreign governments already having too much of their reserves in USD and need to diversify, etc). Think of gold as a “universal currency” with which you can use to hedge against the dollar’s depreciation. Alternatively, you can bet against the USD by buying CDs in foreign currencies.
You mentioned “companies that hold 1st deeds”. I’m not familiar with them. Could you tell me what they are ?
In general I don’t usually invest in stocks because I don’t have enough time to research on individual stocks.
LewisFebruary 3, 2006 at 10:58 AM #23386
Leung Lewis, you might want to check a thread on a blog about how to profit during a housing bubble bust and recession. http://housingbubblecasualty.com/forum/index.php?topic=5.0
Also, a 1st deed is the first claim to your house. Your mortgage company holds a 1st deed. If you take out a HELOC, that lender would hold a 2nd deed of trust. They are second in line to be paid if you default or go into foreclosure; thus, they have a higher risk, charge more interest. And the companies selling the income stream to these 2nd deeds of trust pay a much higher yield, like 10% – 12%.
Also, be careful if you are in any pension fund or money market fund or bond fund that holds any GSEs. Divest yourself. Fannie Mae and Freddie Mac, and the other GSEs are highly leveraged in housing, and when the bubble bursts, they will default on their payments. Fannie is already under federal regulatory scrutiny, and have to revise their income many years back. Most Americans are exposed to this, and don’t even know it. I bet the city pension funds hold this in a large sum. They’re all chasing those high yields, and there is a false sense of security in holding GSE instruments.
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