3 Ways You Can Profit from a Down Real Estate Market

April 24, 2008

The real estate bubble was several years in the making and has been deflating for a year or two now.  It’s hard to say exactly when it popped because the real estate market is so regional but it’s pretty evident that billions of dollars of bubble money have evaporated from bank balance sheets and home owner’s real estate values. The real estate crisis has caused a real mess for the financial sector and no one knows how long the impacts will continue to plague the US economy.

Just like the falling dollar, we feel helpless in the face of the credit and real estate implosion.  What can we do to avoid getting sucked down by the bursting bubble? If every cloud has a silver lining, where’s the opportunity here?

Reduce Your Housing Expenses
The most obvious move you can make is to research refinancing your mortgage.  The Federal Reserve has been cutting interest rates to try and prevent a sudden/massive shock to the US economy so borrowing money is cheaper.  Refinancing your mortgage can save you thousands of dollars of interest, depending on your prior rate and the term of your loan.  The costs may include discount points you buy, an application fee, a title search, and an appraisal fee.

Of course if you bought at the peak of the bubble this may be more difficult since your home may appraise at a lower value than the amount you paid for it.  This brings up a second possible way to reduce your housing expenses.  Using the appraisal you purchased for refinancing as evidence, you can challenge the value that your local government places on your home for real estate tax purposes.  Each locality has their own process for how to challenge the tax assessment.

Buy Discounted Assets
As real estate values continue to fall and the stock market struggles there will be bargains to be had.  Of course, you don’t necessarily have to buy stocks or real estate to benefit, lets look at some examples.

A real estate investor that buys properties and tries to flip them or rent them out may need to raise some cash to pay debts they took on during their expansion.  They might sell property from those empty homes or apartments just to raise needed money.  You could walk away with nice furniture or appliances for a bargain.

Another example are companies that are seeing losses in profits due to the weakening economy.  In order to prop up sales they might offer low prices or long-term financing that you could take advantage of.

Of course, one option is to invest directly in quality company stocks or real estate, buying them at a discount to their price a year or two ago.  The big question here is when to buy.  How do we know when prices have stopped falling and we’ve hit the bottom?

Since we don’t know when things will turn around it would be speculation to dump a bunch of money all at once into a property or stock.  You could setup regular payments into a real estate REIT or an ETF tracking the banking industry.  Although their value may continue to decline, you’ll be buying in smaller increments so your risk will be diminished.  Here’s an article from the Motley Fool about investing in banking stocks.

Bet Against Industries
I mentioned above putting money into real estate REITs. John Rubino points out in his book “How to Profit From the Coming Real Estate Bust” that some REITs, such as Health Care and Rental, should do well in a down real estate market and there are others that will likely suffer, such as mortgage, office, and commercial REITs.

If you follow Rubino’s logic and feel comfortable making the assumption certain stocks and industries will definitely suffer from a decline in real estate, you can actually make financial bets against them by selling short.

This is the riskiest strategy I’ll cover today and one that I have no experience with but it’s an option that exists to potentially make money off of down industries so I’ll mention it.

Basically short selling is borrowing shares of a stock through a broker and selling those shares at one price. Then if the share value goes down, you can buy the shares at a lower price and return the borrowed shares to the broker. Here is how Investopedia defines it:

“The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.”

They also note that “This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.” The main risk is that the stock value actually goes up and in order to cover the shares you borrowed, you have to buy the stock at a higher price than you borrowed it for. The danger of selling short is that you can actually lose more than you invested depending on how high the price of the stock actually climbs. 

Although it sounds counter-intuitive, there are ways you can make money from troubles in the real estate market: 

Be sure to check out yesterday’s coverage of how you can make money from the falling dollar and check back tomorrow for 3 Ways to Make Extra Money in a Recession.


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Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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7 Responses to 3 Ways You Can Profit from a Down Real Estate Market

  • Experts on Credit

    Great post. I live in Los Angeles where the real estate market took a pretty bad hit.

  • Ben

    Thanks for the tip Eric! I’d never heard of the CME before.

  • Eric

    In addition to selling REITs or the like short, you can also buy or sell futures on housing prices at the CME – CME Housing futures and options. Then you can more specifically target your city or region. I live in the Washington, DC area, so I can buy a PUT on the region, which would be a hedge against further housing price declines.


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