Every time it appears that real estate prices are hitting a ceiling, they break through. However, rising interest rates could finally be the road block the sector needs for bearish traders to capitalize.
Since the start of the pandemic, real estate prices have been skyrocketing as social distancing measures forced many to use their homes as their work spaces. Now, the real estate sector faces rising interest rates, which could turn off prospective homeowners.
“We saw a clear shift in the housing market as rates rose to 5% at the end of March,” Devyn Bachman, vice president of research at John Burns Real Estate Consulting, told Fortune. “We are hearing about qualification issues, rising cancellations, and increased buyer hesitancy, particularly at entry-level price points and in remote locations.”
While not acutely indicative of what real estate price are doing, the S&P 100 Real Estate index and the Morningstar Real Estate Sector index are showing some bearish undertones. This could provide fodder for inverse plays in the real estate sector.
A Bearish Real Estate Trade
Rather than handpicked real estate sector stocks, traders can capitalize on their bearish hunch with the Direxion Daily MSCI Real Est Bear 3X ETF (DRV ). The fund is up 5% on the year as the prospect of rising interest rates continues throughout the year.
DRV seeks daily investment results equal to 300% of the inverse of the daily performance of the MSCI US REIT Index, which is a free float-adjusted market capitalization-weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index. DRV invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index.
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