Contrarian on Housing?

For those considering a contrarian play on housing in the US market, you might do well to read this on Seekingalpha.com. It discusses whether you should use physical real estate or homebuilder stocks as your instrument and its pros and cons.  

Mean Reversion?
Source: Seekingalpha

The real difficulty of being contrarian is that while it might seem obvious as a "fantastic" opportunity on hindsight if homebuilder stocks see a strong recovery on the back of an improving housing market, there are also 1001 reasons why there might not be such a great recovery, all seemingly very logical. 

It never is easy being contrarian, which is why while everyone knows the dictum to buy low and sell high, or Warren Buffet's famous phrase, "be fearful when others are greedy and be greedy when others are fearful" seems like a truism, it is actually extremely difficult to execute.

It might be wise when considering a contrarian position, to focus not on the upside rewards, but on the downside risk, and then decide whether you can stick with it. Hence, an important question is, what level of rewards do you expect if your contrarian play proves to be right, and what is your downside if you are wrong? It seems that for homebuilders stocks now, the downside is more or less already in the share price, while the upside can be tremendous but it might require 

1) great patience as time is needed for the housing market to unwind the foreclosure cliff,

2) a strong stomach as huge volatility can cause huge swings in the market value of your investment instrument.

Nasdaq Composite (.IXIC). Chart by Google Finance

Housing, and other types of similar contrarian plays, might (once again, on hindsight) be the investment opportunity of a lifetime, or the investment dud of a lifetime. Those needing some restraint to curb their enthusiasm need look no further than the 2000 dot-com bubble. The NASDAQ composite, despite the massive recent runs in the wider stock market, still sits more than 40% from its peak, 11 years later. 

Anyway, the next post would be about DR Horton (NYSE: DHI), the biggest homebuilder in the US. Watch out for it.

Disclosure: I have direct holdings in DHI but no direct holdings in physical property in the US.