Here experts Forex Brokers explain why.
A housing crisis is caused by a lack of available homes and an increase in the cost of renting and buying.
Typically, when the economy is booming, the housing market accounts for nearly 20% of GDP. A positive housing market positively impacts GDP in two ways.
First is the rise in GDP as a result of an increase in home purchases. The second is caused by the demand for housing services and an increase in consumer spending typically follows the purchase of a home.
While this is bad news for homeowners, the housing crisis may be a significant catalyst for an increase in financial trading. In this article we discuss why.
How the housing market affects Forex trading
The value of residential properties decreases when activity in the real estate market decreases. Whether or not a homeowner intends to sell their property, they will be adversely affected by the significant drop in the amount of mortgage loans that financial institutions are willing to make available. As a result, consumer spending will decline.
An increasing unemployment rate, decreasing income, and decreasing spending are all exacerbated by a decline in consumer spending, which might eventually lead to a recession. To this end, investors pay close attention to housing data such as housing starts as a leading economic indicator.
Added to this, the declining income and increasing unemployment rate may also drive people to find additional means of generating an income.
Forex trading, with its broad-based access through regulated Forex brokers in the UK, low barriers to entry, and possibility of real profits, present excellent opportunities for retail investors to generate an income during a recession.
Furthermore, those traders who can skilfully trade the markets during a recession may in fact profit from the housing crisis, surprisingly.
How to short the market during a housing crisis
In order to profit from a housing crisis, shorting the housing market and investing in real estate investment trusts (REITs) are two common strategies.
To put it another way, shorting the housing market is taking a position to sell an asset, with the expectation that the value of real estate will decline. This allows traders to hedge their exposure to the market and even profit from a decline in the market.
You can borrow an asset from a broker and then sell it at market value when short-selling. It is possible to profit from a fall in asset value if you close the trade and sell back the asset to your broker. For example, if the market price of an asset rises, you’ll have to buy that asset back at an increased market price.
Shorting the housing market is simply speculating that the price of homes will decrease at some point. Since it is impossible to short the housing market directly, investors and traders turn to alternative assets like real estate investment trusts (REITs) or shares of companies in the sector.
In the absence of a REIT or stock broker, most shorting is done through a derivative product, such as a CFD. To open a short position on one of these products, you do not need to own the underlying asset; instead, you are speculating on the price movement in the future.
Because predicting when and where a market crash will occur is difficult, knowing when to open a short position can be challenging. As a result, many traders and investors use technical and fundamental analysis to spot market turning points before they actually happen to occur.
There is a strong belief among many analysts that if house prices and stock prices fall, a strong rally is likely to follow. Short-sellers need to be aware of the same price levels that buyers and investors look for when entering the market.