Investing in residential REITs would leave you exposed to a 2008-type event, which is looking more likely by the day. More importantly, these REITs are also facing the need to refinance low-yielding assets at high interest rates.
EQR, for example, last reported a return on assets of 2.62%. As their bonds and loans come due, they will need to refinance those assets in the 6% range.
Even more importantly than that, the value of an REIT does not necessarily have anything to do with the value of housing. E.g. EQR is selling at the same price it sold for in 2018, even though the
S&PCase-Shiller home index went from 198.5 in March 2018 to 293.17 in March 2023.
What if you spun around your house hedging hypothesis like this:
If there is NOT a housing correction, house prices will go up.
If house prices go up, mortgage-backed securities will hold their value.
If mortgage-backed securities hold their value, banks and mREITs will be OK.
So what you're really hedging against is the scenario where banks and mREITs do OK. You're looking for an investment that will pay off if banks and mREITs do OK, but which limits your losses, and which has close to a 2 year horizon.
I looked into the math of using options on NLY to hedge. They have expirations as far out as January 2025 right now. In either a long call or a bull put spread strategy, you're probably putting more money at risk than you'd like to risk.
E.g. Leveraged mortgage REIT NLY is selling for $19.16 right now. One bull put strategy I looked at with strikes at 20 and 22 would (at a scale of 950 spreads) pay out $150k in the event of things going OK. But it would lose a net $40k if things didn't go OK and NLY remained below $20/share (smaller losses if the price is between 20 and 21.58 at expiration). Could you stomach a $40k loss? Maybe that's still a good hedge because if things go OK you'll need that extra $150k and if things don't go OK you'll be buying the house for a lot cheaper anyway.
Of course, betting on NLY has the same problem as betting on EQR: The price of the REIT is not connected to the price of the home you'll buy. NLY has been falling since 2011, and we know what house prices did in that timeframe. The odds of the above hedge losing money must be multiplied by the risk of divergence between NLY's price and house prices.
Now NLY is holding many of those sub-4% mortgages people on this forum brag about, and facing refinancing costs around 10%. Like EQR, NLY has lots of reasons to keep doing badly even if the economy nails a soft landing and house prices continue to appreciate.
So there's a good case for just investing in a portfolio you can hold through whatever happens, with the best risk-adjusted returns you can find. In most years, such a portfolio outruns housing appreciation anyway. We've just had our expectations skewed by massive increases over the past few years of low interest rate mortgages.
