Real Estate ETFs: Who Would Benefit from a Mortgage Bailout?

Yesterday, the papers reported a number of staggering statistics. One of the most troubling? Year-over-year price declines for Southern California homes hit 27%.

Granted, the country at large has not seen the same level of price depreciation as the bubble markets of Florida and California. Moreover, the bubble markets climbed much further during the housing boom.

Yet the impact of California's economy on the U.S. should not be understated. In fact, if California were its own country (it's not?), its economy would rank higher than Canada to the north and Mexico to the South. For that matter, I believe it still ranks higher than Brazil, Russia, India and South Korea.

What I am saying here is that the housing bust in California alone will have a notable impact on the U.S. economy at large. With 40% of California homeowners owing more than their homes are worth, it would seem that many will need to stay focused on paying their bills. There's less room for "discretionary spending."

On the other hand, price stabilization is in sight. Why? Distressed properties and foreclosures comprise nearly half of the homes on the market. Buyers are actually participating (i.e., increasing demand). And homeowners who do not have to sell are resigned to playing the waiting game (i.e., less supply).

I do not believe price stabilization will lead to an immediate return to steady appreciation over time. There may be several years of "nada mucho." However, after the fall runs its course, exchange-traded exposure to real estate could be quite profitable.

Consider two vehicles that are in the works: MacroShares Major Metro Housing Up ETF (UMM) and MacroShares Major Metro Housing Down ETF (DMM). The first will seek double the price of the S&P Case-Shiller Composite Home Price Index, while the second will seek double on the downside.

A real estate bear who believes home prices will continue falling for months and/or years to come might seek a trader's fortune in Housing Down. Yet I am inclined to believe that Housing Up may begin to show consistent gains from the springtime of 2009 on forward. (Neither investments are available as of yet.)

Another reason to believe that stabilization will occur? The government is likely to pass some form of the "Foreclosure Prevention/Homeowner Rescue" Act. (See this article on rescuing homeowners with distressed mortgages.)

While "bailing out" some distressed homeowners may be a kick in the face of honorable homeowners and tax-paying renters, it's not much different than what government already does; that is, government redistributes wealth from those who have more of it to those who have less of it.

Bailing out those who over-reached? Punish those who made wise home purchases or waited patiently for a realistic opportunity? If government intervention is going to happen in spite of how it makes one feel, the only question left is, how might you profit as an investor?

For example, if less homes go into foreclosure, that may further decrease supply. Meanwhile, tax credits for new home-buyers may further stimulate demand. And anything that changes the supply-demand dynamic for housing could give the economy a boost. (I only said "could.")

In essence, I am going to be looking to the future on the 2 new funds: MacroShares Major Metro Housing Up ETF and MacroShares Major Metro Housing Down ETF. While I am merely speculating at this point, Housing Down  may have near-term potential whereas Housing Up may have legs for a 5-year run beginning some time in 2009.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[carey_jim]

At 1.7 trillion, California's GDP is slightly below that of France (2.2 trillion) and Italy (1.8 trillion) or about 13% of the US GDP.
Also, California makes better wine than France and Italy combined, IMO, of course.

[squashnut]

yes if you combine a french and an italian wine it may not be very good.

[sickofthehype]

Just because median prices go down 27% YOY does not mean that everyone's home has fallen 27%, especially with 50% of the sales being bank owned POS homes.

Where do you get the stat that 40% of CA homeowners are underwater?