The Big Short: Short Selling Activity and Predictability in House Prices

Abstract

We study how investors use financial securities to speculate on the decrease of house prices. Unlike most asset types, houses are subject to high trading frictions and cannot be sold short. Using U.S. data from 2006 to 2013, we find evidence that an increase in the short selling activity of real estate investment trusts (REITs) forecasts a decrease in house prices in the subsequent month. The magnitude and significance of this effect vary with the geographical location of the REITs' underlying properties and with the state of the business cycle.

Keywords: Housing prices, short sales, financial crisis, equity lending, REITs

JEL Classification: G10, G11, G14, G17