Month: May 2024

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As the temperatures rise, so do our energy bills, especially for apartment dwellers. However, whether you live in apartments in Phoenix, Arizona, or a home in Tampa, Florida, with a few simple adjustments to your daily routine and habits, you can significantly reduce your energy consumption and lower your utility bills during the summer months. 

This ApartmentGuide article unveils nine apartment energy-saving tips to help you keep cool without breaking the bank. Now, let’s get started.

1. Open windows during the morning hours

Take advantage of cooler morning temperatures by opening your windows to allow fresh air to circulate throughout your apartment. This natural cooling method can help reduce your reliance on air conditioning later in the day.

2. Close curtains and blinds

During the hottest parts of the day, Aimee Skrzekut, president of Southeast Energy Efficiency Alliance, recommends keeping your curtains and blinds closed to block out direct sunlight. This will prevent your apartment from heating up and reduce the need for your air conditioner to work harder to maintain a comfortable temperature.

3. Set the thermostat to 78 degrees and use fans

Ambar Orantes with LA Heating Air Conditioning suggests setting your “thermostat around 78 degrees Fahrenheit when you’re at home and adjusting it to 85 degrees Fahrenheit when you’re away. Be sure to utilize ceiling fans or portable fans to help distribute cool air more efficiently. Fans create a wind-chill effect, making you feel cooler without having to lower the thermostat temperature.”

Troy Morgan with PanTech Design shares how “pre-cooling during summer months can help you save 15% on your energy bill.” He explains that you can do this by “cooling the apartment early in the morning…and then setting the thermostat to a more normal temperature.”

4. Turn off lights when you’re not home and opt for LED lighting

Make it a habit to turn off lights in unoccupied rooms to save energy. Additionally, Petar with NY Energy Project suggests replacing traditional incandescent bulbs with “energy-efficient LED lights”, which consume less electricity and last longer.

5. Run full loads of dishes with an energy-efficient setting

Wait until your dishwasher is full before running it to maximize its efficiency. Use the energy-saving or eco-friendly setting, if available, to reduce water and energy consumption during the dishwashing cycle.

6. Optimize when and how you wash laundry with energy-efficient settings

Wash your laundry in full loads and use cold water whenever possible to save energy. Most modern washing machines offer energy-efficient settings that use less water and electricity while still providing effective cleaning results.

7. Try to avoid using your oven

Ovens can generate a significant amount of heat, which can make your apartment warmer and cause your air conditioner to work harder. Shannon Hernandez, owner of BrightLife Electric in Reno, Nevada, recommends opting for cooking methods that produce less heat, such as using a microwave, slow cooker, or toaster oven.

8. Check that your windows and doors are properly sealed

Inspect your windows and doors for any gaps or cracks that could allow warm air to enter your apartment and cool air to escape. Seal any leaks with weather-stripping or caulking to improve energy efficiency and reduce air conditioning costs.

9. Assess your options on electricity plans

Christine Ji with LowerEbill recommends that you research different electricity plans offered by utility providers in your area to find one that best suits your energy consumption habits and budget. She shares how “families in deregulated states can achieve substantial savings.” Consider plans with lower rates during off-peak hours or those that offer incentives for reducing energy usage.

Try these energy-saving tips all summer

By incorporating these nine apartment energy-saving tips into your daily routine, you can enjoy a cooler and more comfortable living space while reducing your environmental footprint and saving money on your utility bills this summer. Small changes can make a big difference when it comes to energy efficiency, so start implementing these tips today to reap the benefits tomorrow.

Source: apartmentguide.com

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To buy or not to buy? That is the question many renters face when trying to decide when or if to jump into the housing market. On top of monitoring mortgage rate trends and housing prices, analyzing the price-to-rent ratio for your desired city is a helpful tool for determining whether it is a better personal finance choice to rent or buy a home. 

The price-to-rent ratio is calculated by dividing the median home price by the annual median rent. A high price-to-rent ratio of 21 or more suggests that it is more expensive to buy a home than to rent, while a lower price-to-rent ratio of under 16 suggests that it is less expensive to buy a home rather than rent. A moderate price-to-rent ratio between 16-21 suggests that it is likely more favorable to rent rather than buy, but it will depend on individual financial circumstances. 

It’s important to note that the price-to-rent ratio doesn’t take into account the overall affordability of an area, but it can be useful in determining if specific property types are fairly valued compared to rental prices. 

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To help renters, buyers, and investors find the next best city to rent or buy a home in, Zoocasa calculated the price-to-rent ratio in 32 cities across the US for single-family homes and condos. Median rental prices were sourced from Rent.com’s most recent report and median single-family and condo prices were sourced from the National Association of Realtors® and individual real estate boards. 

In every condo market we analyzed besides San Diego, the price-to-rent ratio suggests it is less expensive to buy a condo than to rent an apartment. Since the Fed began raising interest rates in 2022, the national median asking rent has remained elevated, hovering around $2,000. But even with borrowing costs high, the favorable price-to-rent ratios for condos indicate that purchasing is a more financially sound option if you have the means.

The highly sought-after markets of New York and Miami have the lowest price-to-rent ratios for condos with ratios of 7.9 and 9.6 respectively. In both cities, the median condo price is more than $250,000 less than the median single-family home price, while the median monthly rent is a staggering $4,121 in New York and $3,057 in Miami. Given the promising potential for equity growth in these competitive markets, purchasing a condo becomes a particularly attractive option. 

Philadelphia, San Antonio, and Chicago have the next lowest price-to-rent ratios for condos – all under 10.3 – with San Antonio having the lowest median condo price of the three at $175,000. 

As the price-to-rent ratio doesn’t take into account how affordable a city actually is, some smaller cities with higher price-to-rent ratios for condos have much lower prices compared to New York and Miami. For instance, Columbus and Milwaukee have price-to-rent ratios of 12.5 and 12.4 respectively, while their median condo prices are below $280,000. The median rent in both cities is also low, further highlighting how the price-to-rent ratio is useful for comparing resale and rental values, but not in directly determining which option is better given personal financial circumstances. 

When calculating price-to-rent ratios for single-family homes, the ratios increase quite a bit compared to those for condos. San Diego, Nashville, and Seattle all have price-to-rent ratios for single-family homes above 21, suggesting that it is less expensive to rent here than to buy. San Diego has the highest median single-family home price on our list at $981,000, which is more than $80,000 higher than the next most expensive on our list, Boston. While San Diego’s median rent of $3,400 is only the fourth-highest on our list. 

On the other end of the spectrum, Pittsburgh has the lowest price-to-rent ratio for single-family homes at 9.6. The median single-family home price in Pittsburgh is $207,100 – the lowest of all of the cities we analyzed. Buffalo is the only other city with a price-to-rent ratio for single-family homes below 12. Philadelphia and Detroit follow with price-to-rent ratios of 12.2 and 12.3 respectively. 

In the majority of cities we analyzed, including affordable cities like Oklahoma City, Houston, and Indianapolis, the price-to-rent ratios for single-family homes exceed 16, indicating that median rent is relatively low compared to the costs of homeownership. 

Although purchasing a single-family home may be more unaffordable than renting in many major cities, opting for buying a condo first and building equity can be a sound step in reaching the goal of owning a larger home. 

If you’re looking to enter one of these markets, whether as a renter or a buyer, it’s important to speak with a local realtor who can give you specific information and guidance about the local real estate market. Give us a call today to discuss your home-buying plans. 

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Source: zoocasa.com

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Lower interest rates gave a lift to refinancing activity for the second week but failed to do the same for those financing home purchases. The Mortgage Bankers Association said its Market Composite Index, a measure of mortgage loan application volume, increased 0.5 percent on a seasonally adjusted basis during the week ended May 10. On an unadjusted basis, the Index increased 0.3 percent compared with the previous week.

The Refinance Index rose 5.0 percent week-over-week and was 7.0 percent higher than the same week one year ago. Refinancing accounted for 32.0 percent of total applications, up from 30.6 percent the prior week.

Applications for home purchase financing fell back 2.0 percent on both an adjusted and unadjusted basis. The unadjusted index was 14.0 percent lower than the same week in 2023.  

“Treasury yields continued to move lower last week and mortgage rates declined for the second week in a row, with the 30-year fixed rate down 10 basis points to 7.08 percent, the lowest level since early April,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The decline in rates led to a small boost to refinance applications, including another strong week for VA refinances. However, the overall level of refinance activity remains low. Purchase applications decreased, driven largely by a 9 percent drop in FHA purchase applications. Conventional home purchase applications were down around one percent. 

Added Kan, “While the downward move in rates benefits prospective homebuyers, mortgage rates are still much higher than they were a year ago, while for-sale inventory remains tight.”

Highlights from the MBA’s Weekly Mortgage Applications Survey

  • Loan sizes relinquished their gains from the previous week.  The average loan request declined to $379,400 from $385,600 while purchase loans dropped from $443,200 to $437,700.
  • The FHA share of applications decreased to 12.4 percent from 12.9 percent and VA applications accounted for 12.7 percent of the total, a 1 percentage point uptick from the prior week. USDA applications appear stuck at 0.4 percent.
  • The conforming 30-year fixed-rate mortgage (FRM) rate of 7.08 percent was accompanied by points that declined to 0.63 from 0.65.
  • Jumbo 30-year FRM rates decreased to 7.22 percent from 7.31 percent. Points increased to 0.58 from 0.46.  
  • The average contract interest rate for a 30-year FRM backed by the FHA was 6.86 percent, down from 6.92 percent, with points increasing to 0.94 from 0.91.
  • Fifteen-year FRM rates moved 1 basis point higher to 6.61 percent.  Points grew to 0.65 from 0.59.
  • The average contract interest rate for 5/1 adjustable-rate mortgages (ARMs) decreased to 6.56 percent from 6.60 percent, with points increasing to 0.66 from 0.65.
  • The ARM share of activity decreased to 7.0 percent of total applications from 7.7 percent.

Source: mortgagenewsdaily.com

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Today, the CPI inflation data missed estimates slightly, meaning it is just a bit cooler than what people were looking for, so bond yields went down right after the report.

Below: U.S. core CPI inflation inflation, running at 3.6% year over year

From BLS:The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in April on a seasonally adjusted basis, after rising 0.4 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

Since shelter inflation is the most significant component of CPI, it matters that this data line goes lower. With housing inflation taking off, we can only have 1970s-style inflation if we have a massive supply shock in other areas.

The Owner’s Equivalence of Rent has caused a lot of chaos this year for Fed members, who were all anticipating this metric would go lower faster. It’s moving in the right direction, but not fast enough.

So why have bond yields gone lower recently: is it the labor data?

So why have bond yields declined recently: is it the labor data?

Below: One month of data on the 10-year yield, currently at 4.34%

The labor market has been getting softer for some time, but it hasn’t broken yet. With the growth rate of inflation well off the peak growth rate of inflation, the Fed has turned more into a dual-mandate Fed. This means we are in a cat-and-mouse game with the bond market and mortgage rates that have valued labor data over inflation for some time now. I discussed the total labor data to explain why the Fed has become a dual mandate again in this recent HousingWire Daily podcast. 

The bond market has headed lower twice since 2022, assuming the economic data was getting weaker, and short-term bond yields have gone lower three times since 2022, assuming more rate cuts are in play. Bond yields have headed back every time because the economy wasn’t breaking. However, if the labor data gets softer, the recent lower yield move makes sense. Once the labor market breaks, the 10-year yield and mortgage rates will go lower, but so far, it’s only getting softer, not breaking.

We have made good progress on the growth rate of inflation since the peak of the data. CPI inflation was running at 9% in 2022 and is at 3.4% today, roughly in line with the average growth rate of CPI inflation since 1914. However, bond yields and mortgage rates are higher today than in some periods with hotter inflation data.

I understand this can be confusing, especially last year when mortgage rates reached 8%. However, if you consider part of the focus was on the economy and the labor markets, then some of the mortgage moves lower and higher make more sense. Remember, for now, labor data is more important to the rate story than inflation.

Source: housingwire.com

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Pending home sales are down and new listings are flat during a time of year when they typically rise. But this week’s softer-than-expected inflation report sent mortgage rates down, which could bring back some homebuyers and sellers. 

Pending home sales fell 4.3% from a year earlier during the four weeks ending May 12, the biggest decline in roughly three months. They also posted a week-over-week decline, unusual for early May. Inventory is losing momentum, too, as would-be sellers stay put to hang onto their low mortgage rate. New listings rose 10% year over year, but they were essentially flat from a week earlier, which is significant because listings typically increase this time of year. 

The housing market slumped because of sky-high housing costs. The median U.S. home-sale price is up 4.7% year over year to a record $386,951, and the median monthly mortgage payment is sitting at $2,858, just $26 shy of the all-time high set in April. But affordability is starting to improve a bit: Daily average mortgage rates have steadily declined since the start of May, and this week’s slightly softer-than-expected inflation report sent rates below 7% for the first time in over five weeks. And 6.3% of home sellers are dropping their price, on average, the highest share in a year and a half, which may mean price growth loses momentum soon. 

“High prices and rates are challenging, but there are ways for buyers to take advantage of the somewhat slow market,” said Marsha McMahon-Jones, a Redfin Premier agent in Palm Springs, CA. “Sellers know that high mortgage rates mean they should expect negotiations, expect offers to come in under list price, and be ready for some back and forth on things like repairs and closing costs. Buyers may not be able to get a lower mortgage rate, but they’re often getting homes for slightly less than the asking price. It’s also a good time to buy a fixer-upper at a lower price point because those aren’t selling as quickly.” 

For Redfin economists’ takes on the housing market, including how current financial events like the latest CPI report are impacting mortgage rates, please visit Redfin’s “From Our Economists” page. 

Leading indicators

Indicators of homebuying demand and activity
Value (if applicable) Recent change Year-over-year change Source
Daily average 30-year fixed mortgage rate 6.99% (May 15) Down from a 5-month high of 7.52% three weeks earlier  Up from 6.55% Mortgage News Daily 
Weekly average 30-year fixed mortgage rate 7.09% (week ending May 9) Down from 5-month high of 7.22% a week earlier Up from 6.35% Freddie Mac
Mortgage-purchase applications (seasonally adjusted) Declined 2% from a week earlier (as of week ending May 10) Down 14% Mortgage Bankers Association
Redfin Homebuyer Demand Index (seasonally adjusted) Lowest level in 2 months (as of week ending May 12) Down 13% Redfin Homebuyer Demand Index, a measure of requests for tours and other homebuying services from Redfin agents
Touring activity Up 5% from the start of the year (as of May 13) At this time last year, it was up 21% from the start of 2023 ShowingTime, a home touring technology company 
Google searches for “home for sale” Down 8% from a month earlier (as of May 13) Down 15% Google Trends 

Key housing-market data

U.S. highlights: Four weeks ending May 12, 2024

Redfin’s national metrics include data from 400+ U.S. metro areas, and is based on homes listed and/or sold during the period. Weekly housing-market data goes back through 2015. Subject to revision. 
Four weeks ending May 12, 2024 Year-over-year change Notes
Median sale price $386,951 4.7% All-time high
Median asking price $418,455 6.6% All-time high
Median monthly mortgage payment $2,858 at a 7.09% mortgage rate 12.7% Just $26 below all-time high set during the 4 weeks ending April 28
Pending sales 90,457 -4.3% Biggest decline since 4 weeks ending Feb. 25
New listings 102,269 10%
Active listings 890,224 14.2%
Months of supply  3.2 +0.5 pts.  4 to 5 months of supply is considered balanced, with a lower number indicating seller’s market conditions. 
Share of homes off market in two weeks  45.2% Down from 49%
Median days on market 33 +2 days
Share of homes sold above list price 30.8% Down from 33%
Share of homes with a price drop 6.3% +2 pts.  Highest level since Nov. 2022
Average sale-to-list price ratio  99.4% Unchanged

Metro-level highlights: Four weeks ending May 12, 2024

Redfin’s metro-level data includes the 50 most populous U.S. metros. Select metros may be excluded from time to time to ensure data accuracy. 
Metros with biggest year-over-year increases Metros with biggest year-over-year decreases

Notes
Median sale price Detroit (18.8%)

Anaheim, CA (18.6%)

West Palm Beach, FL (16.2%)

San Jose, CA (13.6%)

Newark, NJ (11.7%)

 San Antonio (-0.5%)

Decreased in just 1 metro
Pending sales San Jose, CA (16.6%)

Anaheim, CA (9.2%)

San Francisco (5.3%)

Newark, NJ (5.2%)

Sacramento, CA (3%)

 Phoenix (-14.9%)

Atlanta (-13.6%)

Houston (-13.2%)

West Palm Beach, FL (-11.8%)

Nashville, TN (-11.1%)

 Increased in 12 metros
New listings San Jose, CA (40.2%)

Seattle (26.4%)

Phoenix (24.7%)

Oakland, CA (24.6%)

Montgomery County, PA (21.9%)

 Chicago (-8.1%)

Atlanta (-3.4%)

Detroit (-3.1%)

Virginia Beach, VA (-1.9%)

Newark, NJ (-1.6%)

Warren, MI (-1.2%)

 Decreased in 6 metros

Refer to our metrics definition page for explanations of all the metrics used in this report.

Source: redfin.com

Apache is functioning normally

Older voters in the battleground state of Pennsylvania are poised to make their presence — and preferences — felt in the upcoming fall elections that will determine control of the White House, the U.S. House of Representatives and the U.S. Senate. Chief on their minds are issues that include Social Security and aging in place.

This is according to a poll of voters within the state conducted by AARP Research, which tabulated survey data from voters ages 50 and older. The organization enlisted a “bipartisan polling team” from Fabrizio Ward (described as a Republican pollster) and Impact Research (described as Democratic) and got perspectives from roughly 1,400 voters across the state.

This included “a statewide representative sample of 600 likely voters, with an oversample of 470 likely voters 50-plus and an additional oversample of 328 Black likely voters 50-plus, between April 24–30, 2024,” AARP Research explained.

In addition to the insights into issues driving older voters’ preferences, AARP Research also found that “Pennsylvania voters 50 and older are the most committed age group for voting in the 2024 election and appear to be on track to be deciders” in the contest, according to the organization.

The top six issues isolated to voters 50 and older include Social Security (79%); Medicare (73%), aging in place (or “policies to help seniors live independently at home as they age, 68%); utility costs (67%) and housing (59%).

For those that named aging in place as a concern, 37% of respondents described it as “extremely important,” while 34% said it was “very important.” That’s only 2% to 3% lower than the split for the Medicare issue, according to the survey.

Sixty-three percent of older voters also said they were “very worried” about their own personal financial situation, with older women (69%) more concerned than older men (59%). Republican voters found themselves more worried (73%) about it than Democratic voters (51%).

In terms of candidate preferences, voters in Pennsylvania stated they are more likely to support former President Donald Trump over President Joe Biden on both a full ballot that includes certain third-party candidates (46% to 41%) and on a direct two-way ballot (49% to 45%).

“Trump is ahead in large part due to more consolidated support from Republicans than Biden is getting from Democrats, while Trump also has a slight edge with Independents,” the report explains. “There are large gender, race, education, and regional differences in [the] planned 2024 vote for president.”

According to research from Penn State Harrisburg released in 2017, “the elderly population’s (age 65 and over) growth occurred at [a] rate over 20 times that of the state’s general population — an increase by 16.3 percent from 2010 to 2017.”

Source: housingwire.com

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After three years of relative inaction, shares of GameStop, the video game retailer, surged in May 2024 after an influential trader posted to social media for the first time in several years. Roaring Kitty, the online moniker of Keith Gill, whose own posts about GameStop helped inspire the meme-stock movement of 2021, posted an image of a man leaning forward, a popular meme among gamers signifying “things are getting serious.”

Since then, the retailer’s stock price has rallied, renewing interest in GameStop as well as a number of other so-called “meme stocks,” including AMC, Koss Corp., and BlackBerry. Gill’s profile initially rose in 2021 in the midst of day traders organizing on Reddit to “squeeze” GameStop short sellers.

A short squeeze is an orchestrated effort to drive up shares of a stock that’s being shorted. In this highly risky maneuver, short sellers are essentially forced to try to exit their bearish position quickly in order to minimize losses amidst the dramatic surge in the share price. Read on to learn everything you need to know about short squeezes.

Key Points

•   A short squeeze may occur when short sellers rapidly close their positions, which can help drive up a stock’s price.

•   This typically follows a sudden increase in a stock’s price, prompting a rush among those shorting the stock to “cover” or close their position.

•   Short sellers buying back shares to close their positions further drives up the stock price.

•   Benefits of investing in REITs include tax advantages, tangibility of assets, and relative liquidity compared to owning physical properties.

•   Short selling poses extreme risks, with the potential for dramatic — and potentially unlimited — osses.

What Is a Short Squeeze?

As mentioned, a short squeeze is an event in the market that involves short sellers having to quickly close out their positions. Because these investors have to actually buy back shares they’ve lent out, this may drive dramatic gains in the share price.

There are many investors, both retail and institutional, who use short selling to bet that a given stock will go down over a fixed period of time. But short selling is incredibly risky as stock prices have historically tended to drift upward. And timing a bearish position can also be picky. Even if an investor has good reason to believe that a company’s shares will fall, it could be some time before they actually do.

What Causes Short Squeezes?

To understand how short squeezes occur, we first have to understand how shorting a stock works. To sell a stock short, an investor must first borrow the shares. They then consequently sell in the open market. At an agreed-upon time, the investor will buy back the shares in order to return them to the original lender.

If the stock goes down between the time they borrow the stock and when they return it the investor makes money. That’s because they pocket the difference between what they sold the stock for and what they purchased it for when it came time to return it.

And if those short investors borrow a stock that goes up instead of down, they lose money.

Example of Short Selling

Let’s look at a hypothetical case of a short sale. Let’s say an investor borrows a stock that’s trading at $10 with an agreement to pay back the shares in 90 days.

The investor then sells the stock for $10. Then 90 days later, if the stock is trading at $5, they can buy back the number of shares they borrowed and return them to the lender, capturing the $5 per share profit (often minus interest and fees).

Example of Short Squeeze

Now, let’s use this example to look at a short squeeze. Let’s say the investor borrows the stock again that’s trading at $10 with an agreement to pay back the shares in 90 days.

This time however, the share price shoots up to $15. The investor still has to buy the shares they borrowed and return them to the lender. But other investors are also trying to cover their shorts as well, so there’s a shortage of shares in the market to buy back.

The shortage causes the stock’s price to jump even higher to $20, which in turn triggers other short sellers to close their positions. They have to now also purchase back shares, and hence a buying frenzy and short squeeze occurs.

Theoretically, there’s no limit to how much money short sellers can lose. When an investor is long a stock but wrong, the share prices can only go down as low as $0. But when an investor is short and wrong, the share prices can go infinitely higher, making it possible losses can be limitless for the short-selling investor.

Recommended: How Low Can a Stock Go?

Famous Short Squeezes

One famous example of a short squeeze was that of GameStop, which first occurred in 2021, when electronics retailer GameStop saw its shares jump more than 1,000% in a few weeks as a wide range of investors looked to take advantage of the high number of short sellers in the stock. This was perhaps one of the most well-known “meme stock phenomena” that overtook the market that year, but it wasn’t the only one. Shares of AMC, Bed Bath & Beyond, Koss Corp., and other company’s stocks spiked upward during the meme-stock frenzy that year.

Another example occurred in 2008, when automaker Volkswagen briefly became the world’s most valuable stock by market cap when it became known that Porsche was increasing its stake in its fellow German carmaker.

What’s a Long Squeeze?

By contrast, a long squeeze is when short sellers drive down the price of a stock or asset until the bullish investors begin to sell their positions in response, driving the price lower still. It can be helpful to review short positions vs long positions to get a deeper understanding of a long squeeze.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

What Was the MOASS?

The “MOASS” is an acronym for the “Mother of all short squeezes.” And it’s more or less exactly what it sounds like: A monstrous short squeeze event in the market.

The short squeeze involving GameStop shares in 2021 is perhaps the best and most recent example of a MOASS, though companies such as AMC and Koss Corp., mentioned above, experienced similar phenomena at the time. Many institutional investors had shorted GameStop stock, anticipating that its value would fall, but groups of day traders worked together to drive up demand of the stock, and its value. This “squeezed” the short sellers, and caused many big firms to lose significant amounts of money on their positions.

How to Trade a Short Squeeze

Given the chance for dramatic returns, many investors have taken an interest in getting in on the winning side of a short squeeze.

To invest in a short squeeze, traders start by surveying the markets for stocks that have garnered substantial interest from short sellers. This factor is often called “short interest,” and as a metric, it represents the number of a company’s shares that have been sold short, but not yet returned to the lender. Traders know that the short sellers of all those shares will have to buy back shares — at any price — to return them to the lender.

There are two ways to understand short interest. One is short interest percentage, which shows how many of a company’s overall shares are currently shorted. A higher number means that more short sellers will be bidding up the stock to buy it back. The second metric is short interest ratio, which shows how much short sellers are responsible for a stock’s daily trading volume. A higher ratio means it’s likely that short sellers will help drive up the stock’s price once it starts to rise.

Another key metric has to do with when the short sellers will have to deliver those shares to the lender. It’s known as “days to cover,” and it’s the ratio comparing the total short-selling interest in a stock with the average daily shares that trade. As a metric, it gives traders a sense of how long until short sellers buy back the stocks they borrowed for their short positions.

Stocks with a high short-interest number and a high days-to-cover number are vulnerable to a short squeeze. Once these traders find stocks that seem like short-squeeze candidates, they buy the stocks outright, and watch those key metrics, along with the news, to decide when to sell. Short squeezes can make a stock shoot up, but those returns often evaporate quickly.

Short Squeezes vs Naked Shorts

As discussed, shorting typically involves borrowing shares to create tenable positions. Naked shorts, often involving naked options, are a type of short selling, but it involves not borrowing, or otherwise securing possession of, shares before making a trade or taking a short position. This leaves the trader “naked” in the event that a trade goes south.

Risks of a Short Squeeze

While short squeeze investments can produce eye-popping returns in the short term, they come with real risks for individual investors, and institutions.

Risks for Investors

For investors, perhaps the biggest risk of a short squeeze is that they’ll get caught on the wrong side of one, and lose some money. Obviously, that’s a risk for institutions as well, but individual investors likely don’t have as many resources on hand to try and recover.

Similarly, investors may misread the room — that is, not quite understand what’s happening in the market, and misjudge their position. They’ll also need to be vigilant in watching their positions to make sure they change those positions at the right time.

Risks for Institutions

Most of the risks involved with short squeezes for individual investors hold true for institutions, too.

For instance, the risks involved with stocks themselves include the fact that stocks with a high short-interest number may be undervalued or misunderstood, or they may simply be failing businesses. And if there is no good news, or market interest, they may continue to sink.

At the same time, the price increases caused by short squeezes are short-lived. Once the short-sellers have paid back their lenders, the market runs out of buyers who will pay any price for that stock. And the share prices often fall as quickly as they rose. The danger to traders in a short squeeze is that they’ll get in too late and stay in too long and lose money.

Long-term investors may try their hands at winning a short-squeeze trade here and there. But it requires deep research, constant monitoring and the ability to move in and out of a stock quickly — something that institutions may have access to more so than individuals.

Investing With SoFi

A short squeeze is a market event in which investors inadvertently bid up the price of a heavily shorted stock, while trying to get out of their bearish positions. In order to buy the stocks that investors borrow to sell short, those investors must buy the stock at ever-increasing values.

Short squeezes involving short positions and financial derivatives are relatively high-level concepts and may involve a skilled hand in navigating. For that reason, it may be worth discussing them, and their risks, with a financial professional.

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FAQ

Are short squeezes legal?

Short squeezes are a natural occurrence in the stock market, but market manipulation is illegal. As the SEC says, “abusive short sale practices are illegal,” and that may play into short squeezes. As such, it’s a gray area.

What is the biggest short squeeze of all time?

While the Volkswagen short squeeze in 2008 was one of the largest of all time, the 2021 short squeezes of GameStop, along with AMC, Koss, and others, were, perhaps, some of the most dramatic and notable short squeezes in history.

How high can a short squeeze go?

Theoretically, there is no limit on how high a stock can go, and accordingly, how high a short squeeze can go.

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