Housing Prices Will Lead to Double Dip Recession: 3 Short Plays

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 |  Includes: CATY, KBE, WAL
by: HiddenLevers

Alas, the double dip recession has arrived. It seems that everyone and their mother in financial media predicted this moment. It goes without saying that this was a long time coming. However, I am certain that I will be among the first to give a glimpse to what exactly the bottom may look like (whenever it arrives) and the new reality that maybe the U.S. home market. Economist Robert Shiller thinks home prices will drop between 5- 10% this year alone. Rather than get caught watching here are some short plays that maybe profitable during this decline. The SPDR KBW Bank Index ETF (NYSE:KBR), Western Alliance Bancorp (NYSE:WAL) and Cathay General Bancorp (NASDAQ:CATY) all have significant downside correlation to the Case Shiller housing prices index:

What’s the cause? Clear Capital cited the primary cause of the double dip in U.S. home prices as a pairing of U.S. government's home-buyers tax credit and the robo-signing scandal. First, government initiatives artificially propped up the housing market until they expired. This was aggravated by more and more distressed properties reaching the market. Banks and the government are still making sense over automated practices in the foreclosure process, without resolution.

The secondary culprits:

  • Stubbornly high unemployment
  • Ever increasing supply of properties on the market (due to foreclosures)
  • Underlying sentiment that rock bottom still awaits, based on long-term Housing Prices

No need to beat the dead horse of unemployment. But it is important to keep in mind that there are still 16 million "zombie homeowners" as tactlessly coined by Brett Arnends. These are the homeowners that are bleeding cash in efforts to keep homes that most likely will never be valued as much as their current mortgages. A home is a home, and people will mostly likely continue to wage this losing battle. Until these secondary factors are addressed it could be quite a while until we actually see the bottom. As I hinted before I think this bottom may find us returning to long term norms. Hiddenlevers helped me model just how this scenario might play out.

I’m not going to drop the dreaded R word, but this could have disastrous effects for the rest of the economy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.