Should You Bet Against Real Estate in 2009?

U.S. home values lost $1.9 trillion through the end of the third quarter, according to a recent Zillow Real Estate Market Report, and one in seven homeowners owed more on their mortgages than their homes were worth. When you're "underwater" on your mortgage, the situation can leave you gasping for financial breathing room.

Investors who expect real estate to remain in a downward spiral for a bit longer might want to consider an investment in a fund like the ProShares UltraShort Real Estate ETF (NYSE: SRS  ) , which seeks returns that are two times the opposite of an index composed of listed U.S. real estate-related securities. If real estate stocks go down, then your shares go up. But the opposite also holds true -- and with double leverage, you'll feel a lot of pain if you guess wrong on the trend for property values. 

Fund specifics
The ProShares exchange-traded fund tracks the Dow Jones U.S. Real Estate Index, which includes companies that invest in shopping malls, apartment buildings, and housing developments, along with real estate investment trusts. Top holdings in the index include Simon Property (NYSE: SPG  ) , Public Storage (NYSE: PSA  ) , and Equity Residential (NYSE: EQR  ) .

The index also includes the largest private landowner in the U.S., Plum Creek Timber (NYSE: PCL  ) , as well as AvalonBay Communities (NYSE: AVB  ) , which owns or controls nearly 50,000 apartment homes in 10 different states, giving it a well-diversified stream of revenue.

The fund itself does not hold individual stocks. Instead, it holds financial instruments such as swaps and other derivatives, which are expected to create the desired returns compared to the index. 

Fund facts

  • Year-to-date return as of Dec. 29: (39.8%).
  • Expense ratio: 0.95%.
  • Assets: $1.0 billion. 

Fund prospects and risks
Despite all of the maneuverings in Washington, the credit crisis seems to be here for a while. If the billions of dollars dispersed by the government finally help turn around the real estate market, then the risk of double inverse leverage will suddenly become quite obvious. Like many other industries, property developers such as Vornado Realty Trust (NYSE: VNO  ) are also actively seeking government assistance. However this plays out, it is likely to have a large role in the value of publicly traded real estate.

Only investors who are able to take on significant risk should consider a fund that is double leveraged. The common consensus appears to be that real estate returns will be negative for at least a year before turning up, but as is often the case in markets, betting with the majority opinion can sometimes lead you astray. For those investors who expect the real estate implosion to have staying power, the California real estate downturn of the late 1980s -- when it took nearly half a decade before prices moved up -- is one model of how this downturn could play out.

In the long run, though, this fund may already have seen its brightest days. Although, having fallen nearly 80% from its highs of just over a month ago, it's entirely possible that the fund could enjoy one more day in the sun before fading when real estate finally recovers.

Further Foolishness:

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Fool contributor Zoe Van Schyndel lives in the Seattle area, where she enjoys the coffee and natural wonders. She does not own any of the funds or securities mentioned in this article. The Fool owns shares of Plum Creek Timber. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (32)

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  • Report this Comment On December 31, 2008, at 12:39 AM, INTMICOMM wrote:

    SRS is going to be the biggest goldmine stock of 2009. The real estate market is not going to recover. WHERE ARE THE JOBS? PEOPLE ARE GETTING LAID OFF LEFT AND RIGHT. How will they pay their mortgages? There is a slow down in global real estate. Shopping is slowing down. Consumers smell the bad news and are refusing to spend money. We are in a full blown depression. I am anticipating a rally in the market with Obama coming in, bringing in more money to pour into the market. I don't believe any of this will save the market. I believe the best gift from OBAMA will be a RALLY and we can see SRS at $25-35 which will be a steal of a life time. Once the money is all spent and the rally is over we will see the biggest wipe out of all time, 3000 - 5000 point drops in the DOW to seeing a dow jones at 5000 or less. SRS will be the stock of the year, we can see prices of $250-$500 again on this stock.

    Just remember in 1929 we had an initial crash, the market then made a rally. After that the dow crashed 85%.

    There is no market recovery, this is a wipe out waiting to happen.

  • Report this Comment On January 02, 2009, at 11:23 AM, golfamatic wrote:

    Careful here everybody.

    Real estate (REITS) as an asset class (short or long) should never constitue more than 15%-20% of your portfolio. 2009 will be the year of The Haves vs Have Nots. The big REITS loaded with cash will be picking up properties on the cheap. Have no idea what market will do in future; but REITS will continue to be 10%-12% of my tax-deferred portfolio.

    Keep in mind, these are the times $$ is made. You are accumulating lots and lots of shares today at low prices.

  • Report this Comment On January 02, 2009, at 1:01 PM, INTMICOMM wrote:

    If you are buying the reits here just be ready to cash out in the next few months. I do feel a Strong Rally coming to push us up to down 10-11k. I would cash out the Reits. This game is no longer a long term investing.

    We are in a deflation. The price of real estate is dropping. The price of construction is dropping. Oil is going down to $25. There is no recovery coming. Only the Amateurs and rookies are going to get fooled by these upcoming rally's. The Pro's are going to slam this market down hard after the amateurs are done buying up the stocks.

    There is a blood bath out there.

    Listen, after the 1st crash of 1929 the market rallied for 4 months. Then after that the market dropped 85%. This is how the game works. It won't go strait up and it won't go strait down.

    All Smart money is in US Treasuries. We are in dangerous times. I would be very careful here.

    In a few months from now, people will start saying "The market recovered, Everything is good now and lets buy." Once I start hearing this from the Amateurs then I am going to start buying up SRS on speculation and I recommend anyone who has risk tolerance to get ready for this trade.

  • Report this Comment On January 06, 2009, at 4:53 PM, thefox2000 wrote:

    This article is interesting, but doesn't address some key questions about the performance of SRS. I would like to know more about the volatility that SRS displayed from Oct 2008 to now.

    The real estate market showed declines throughout 2008, yet it wasn't until late Oct that SRS spiked to 200, then in November almost to 300. Now, it's dropped back to 50, a level not seen since 2007.

    Question 1: What caused a relatively sudden spike upward in SRS/downward in the index? I have seen one or two comments about a credit crisis (hah hah), but I'd like to somehow confirm the linkage. It makes sense that there might have been a sudden clamp down in credit, which affected the entire RE market, and devalued a lot of the properties held by companies in the DJ RE index. However, what in the world caused the gyrations shown between Oct and Dec 2008. You might think that property values were going only in one direction (down), which would cause SRS to go one direction (up). But the chart clearly shows a lot of up and down.

    Question 2 (more important to me than 1): What caused the pull back in SRS from 200+ to now 50? Has the real estate market really recovered to pre-2008 levels? That seems impossible.

    Even though I believe there is more downside left in the market, especially in commercial RE, I can't really see investing in SRS until I understand what is driving the behavior described above.

  • Report this Comment On January 06, 2009, at 8:17 PM, sxr951 wrote:

    Any trade pros here tonight? on srs untrashort inverse traded funds. which gains value when the dow drops. i made over a thousand today when it hit around 52 today a few bounces with 2000 shares. worked out great. it actually bounced a few more times but i had to leave my pc for 2 hours on bizz. Anyway my question is since the market stopped at 4:00 as always. the srs has bottomed out to almost record lows. should i get in with 2000 shares and wait for the next run up over $55.00 a share as it has done 7 times since dec/ 26/08 and over $57.00 today!! it just keeps bouncing up and down with plenty of ops to clean up. just buy and hold till it hits your price in a few days is what it has been doing. I need to make a decision tonight b4 the opening bell to get in on this price. before it soars again. its at 49.74 rt now at 8 pm eastern time. wow what a buy!

  • Report this Comment On January 10, 2009, at 3:45 AM, NostraDodger wrote:

    I'm betting that the SRS is about to make a short run, up, until the 20th of this month. I'll sell on the 16th, just to be on the safe side.

    And then?

    I'll try to get back in, before Simon Properties releases it's earnings, at the end of the month. I believe Simon says; SRS is a huge buy!

    If not now - it'll pay me back by the 20th of Feb.

  • Report this Comment On January 12, 2009, at 12:50 PM, nsdzootv wrote:

    what do you think is the upside for srs? 70? 80? higher?

  • Report this Comment On January 12, 2009, at 11:55 PM, NostraDodger wrote:

    I think we're looking at at least 85, before the end of the week. Then, due to the Obama facter, I think it can fall all the way back to 50 sometime next week.

  • Report this Comment On January 13, 2009, at 1:06 AM, falang1 wrote:

    thefox2000,

    SRS is a short of real estate company stocks. It doesn't short the real estate market itself. Even though the market has been heading steadily downward, the stocks have bounced around like crazy. The actual price of SRS means nothing historically as it is based on 2x daily values. And I really don't see it at 85 this week. Good luck playing with that one. I would be careful with SRS in the short term. If Obama announces some pro-home builder or homeowner plan it could get wiped out quick.

  • Report this Comment On January 13, 2009, at 4:36 AM, NostraDodger wrote:

    If the main holdings, in the fund, take a thrashing for the rest of this week; such as SPG, PSA, or PCL, then the SRS will jump. 85's not out of reach. It could take out 100 in a hurry. Double Inverse!

    The Dow will soon trade below 6000! Once this comes to fruition, the clowns - claiming - that we're back to BULL Status will be thrown from the Bull and eaten by the Bear.

    I also look for an Obama bounce. He may bring Hope, and announce anything he likes, but Hope will soon turn to despair. Count on it!

  • Report this Comment On January 21, 2009, at 3:22 AM, NostraDodger wrote:

    I wonder where the 3:00 o'clock rally, in the Dow, went today? Is it possible that old two faced Hank wasn't around to put our hard earned tax dollars to work, supporting the Dow, at the critical level of 8145?

    Since there's no sheriff in town, I suspect we may finally have the capitulation that's required before we move higher. That said; look for the Dow to fall through 7500, for starters, and then on down to around 5999 - before it catchs it's breath.That should put a tail wind in the SRS; but be ready to pull the sell trigger when you see blood in the street.

    Note. We should have seen it fall through this support last week, but Hank and his Goldman buddies can't seem to let the markets work it out for themselves. I guess they'll all blame it on Obama's speech today? Who knows?

    I look for the Dow to be up in the morning, and fall in the evening. If you're already in the SRS - it may pay to stick this one out - but if you're not, you might want to sit on the sidelines!

    Remember! This is a dangerous play, so be reminded that any loss of your money is your own misfortune. You know the saying; Past performance is no .....!!!

  • Report this Comment On January 31, 2009, at 2:48 PM, UltraContrarian wrote:

    It is in the nature of leveraged ETFs to deliver poor performance. I believe it will be more profitable and less risky to short the most overpriced, overleveraged real estate companies: ALX, IRC, IRET, HME, MAA, etc.

    On drops you can also look at buying the REITs that will survive and thrive: MPW, SLG, etc.

  • Report this Comment On February 03, 2009, at 12:33 PM, joseroncal wrote:

    We’re all aware of the calamitous mortgage crisis with consumers loosing their homes, bank foreclosures, the lending freeze and the rapid unraveling of the economy in general. Now the mortgage crisis is moving to Main Street and the commercial real estate market is taking a pounding.

    Not too long ago, investors were jumping into the commercial real estate fast lane, buying up office towers, apartment complexes, hotels, shopping malls and any spec property that promised to reap rewards through escalating values. But now things are not looking so rosy for commercial real estate.

    Contractors, investors and developers are facing what could be the worst real estate crisis since the early 1990s. The crisis in the 1990s happened when federal tax breaks led to overinvestment and overbuilding. But the impending crisis is the result of cheap credit, which tempted developers to bid up the prices of existing properties creating a price bubble.

    Once again, banks are left holding the bag. In the second quarter of 2008, banks held more than 50% of commercial real estate loans, with smaller, regional lenders having a relatively larger exposure. Regional banks are now waiting for a second wave of loan losses to hit, this time instead of toxic residential debt, it’s shopping centers, hotels and major residential and commercial construction projects. The charge-off rate for these loans is about 1.1% and growing.

    The number of overdue commercial construction loans is on the rise, which portends a rise in defaults. In the third quarter of 2008, overdue loans had quadrupled from two years earlier for the same period, according to Federal Reserve data. That’s the highest spike since 1994.

    Jeffrey DeBoer, president of the Real Estate Roundtable estimates that about $400 billion worth of commercial real estate mortgages will come due by the end of this year. But since many banks have stopped lending to any new construction projects, developers will have a hard time refinancing the hundreds of billions in loans already on the books.

    The Roundtable is part of a real estate affinity group that's leaning on the Federal Reserve and Treasury Department to create a special lending program for the commercial mortgage-backed securities market. No decisions have been made, but Treasury did indicate that extending part of their financial bail-out package to this market sector is within the realm of possibility.

    Meanwhile, major construction projects across the country are on hold. From churches where the membership is uncertain about spending funds, to universities that have seen their endowments collapse, to individual developers who aren’t willing to spend money in the current economic mess. Even architectural firms are feeling the pinch as skittish clients cancel large projects.

    Even though the downturn in the commercial real estate hasn’t been as dramatic or as headline grabbing as pictures of homeowners sent packing, commercial defaults could deepen and prolong the recession. Moody's Economy.com estimates that commercial real estate losses could slice about $30 billion from our economic growth this year.

    Many in the construction industry are pushing Congress to approve President-elect Obama's proposed stimulus plan to revive the economy and pour hundreds of billions of dollars into rebuilding the infrastructure. It could be enough to keep developers, construction workers, architects, engineers, heavy equipment manufactures and staff members employed and supplied with spending cash until the economy recovers.

    But will Obama’s plan succeed in reviving the economy and boosting consumer confidence? Will he make good on his promise to spend those funds on rebuilding the country’s infrastructure? Will he even mange to get the necessary funds in the face of growing skepticism over missing money that banks received in the first stage of the bailout package? If things go according to plan, construction firms might be able to turn their attention to public works projects like bridges, roads and schools. When you consider the huge budget shortfalls of many states and municipalities, there appears to be a sizable backlog of projects in need of funding.

    This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are You Investing or Speculating?" - For more information, visit www.financialspeculation.com

  • Report this Comment On August 27, 2010, at 3:48 AM, realestateagent wrote:

    Through this article you are aware about real estate of 2009 and should you bet against that. You will be acquainted with fund specifics, facts about funds as well as fund prospects and risks etc after fetching detail information through this website. Moreover those who want to purchase their housing apartments or other properties for their commercial, business and demographic purposes and looking for some of the good real estate agents or dealers can contact at 0120-4338222 or 800-232-2343.

    www.ncrdealer.com

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