James Grant's Investment Strategies for the Housing Predicament

James Grant pens yet another must-read piece in Forbes:

By a margin of almost 2-to-1, economists surveyed by WSJ.com last month judged that the worst of the residential real estate slump was history. House prices will soften in 2007, the sages predicted, but by only a little bit. In fact, 20 of the 49 respondents forecast a rise.

Ebenezer Scrooge was a mortgage banker, and the arguments I am about to marshal for a hard landing in housing might sound un-Christmaslike. But during the just-pricked bubble, it wasn't the Scrooges and the Marleys who lent more than 100% of the purchase price of a house without bothering to verify the income or employment of the applicant, or even to insist that he or she pay down a little bit of the principal now and then. House prices soared on the wings of the modern, optimistic, growth-obsessed mortgage industry.

And he offers some ways to play this:

Investment strategies to deal with this predicament could involve two exchange-traded funds. Bears on residential real estate could sell [if they own it] or short [if they don't] the StreetTracks SPDR Homebuilders (XHB) or buy the puts thereon.

XHB 1-yr chart

To profit from a housing-induced drop in short-term rates, buy the iShares Lehman 1-3 Year Treasury Bond Fund (SHY) or its call option.

SHY 1-yr chart

I need to point out that I am not invested in any of these moves, and I have no idea whether or not his views of housing will prove true. But I always find Jim Grant worth reading -- and his opinions worth considering.