Is a sharp correction in store for the real estate market?

Fannie Mae, the largest buyer of mortgages in the US, is worried. They recently warned that the probability of a housing bust has risen sharply in certain parts of the country.

Fannie Mae and Freddie Mac financed about 43% of new home mortgages last year. That's down from 53% the year before.

Fannie and Freddie only buy "conforming loans" In these days of easy money and competition for borrowers... more lenders are selling mortgages to non-government sponsored loan buying companies. They have less stringent lending standards. That means more risk as it allows home buyers with poor credit records or unconfirmed income to qualify for mortgage loans.

Listen to this! 24% of the sub-prime loans sold to non-conforming buyers in 2004 were adjustable rate mortgages with an interest only feature. And... these mortgages are not restricted to less expensive houses. The share of jumbo mortgages loans ($359,650 & up) accepted without full documentation increased from 27% in 2001 to 51% in 2004.

Fannie Mae warns that the real estate collapse of the late 1980s was preceded by similar patterns.

Some point out that the real estate bubble is effecting value in just certain areas. But they don't understand that just 22 of the most expensive metropolitan markets in the U.S. account for 35% of the total value of the country's residential real estate.

If those markets begin to collapse they will shock real estate values everywhere.

What should you do if you are sitting on fat real estate capital gains. First... make plans now. Once a correction (crash) begins you will have a hard time getting out of your property. Values plunge and buyers disappear.

If you don't believe there will be more than a little dip in real estate appreciation and you want to hold on to your property... here's an idea. Use the stock market as insurance. How do you do that?

Find real estate stocks and do short selling. Well managed this can be an effective strategy.

If real estate values continue to climb you still own your property and continue to accumulate capital gains.

If real estate values begin to fall you sell short selected stocks and profit from the decline, which balances the loss in the value of your real estate. You protect your real estate gain... and maybe even come out ahead on the strategy.

An ETF is an Exchange Traded Fund. That's a basket of stocks that trade under one symbol just like a stock. You can quickly buy, sell or short an ETF through an online broker in seconds. You have instant liquidly... something you don't have with real estate.

Two ETF's that you could be ready to short sell would be:

IYR - A basket of real estate stocks

IYF - A basket of financial stocks.

Lots of areas would be hard hit by a down turn in real estate including: banks, mortgage lenders, utility companies, materials suppliers and especially home builders.

The stocks of leading home builders that would suffer during a real estate bust include:

Brookfield Homes - BHS;
Beazer Homse - BZH;
Centex Corp - CTX;
D R Horton - DHI;
K B Home - KBH

Yes, short selling is a radical strategy for the smaller real estate investor, but aren't you the one who needs the gain protection the most?

You may find a local stock broker that would give you some help, but you should understand some basics about the stock market and trend following.

You can easily learn that here... http://digbig.com/4dxys

Mark Walters is an investor-entrepreneur helping other investors from his Web pages at http://www.Lease-Option-Sub2.com