Thanks to Bryan Caplan for his excellent post this morning. In the Comments section, people discussed the difficulty of shorting housing even if you thought it was overpriced. I'll tell two stories of two friends who saw what was happening. One didn't act on his insight and one did.
First, the friend who didn't act. He lives in about the only at-all upscale neighborhood in Detroit. In about 2005, people bought a house next to him and drastically overpaid, by his estimate, with a big mortgage from Washington Mutual. After buying, they let it sit. He sensed a scam between the buyer, the seller, and the appraiser. So he called WaMu and told them what he had observed. The person he talked to said, "Do you think we don't know how to run our business?" She had no interest in learning more.
How could he have acted? By buying put options on WaMu stock. He didn't.
In about the same year, another friend, who was a principal in a hedge fund, thought that California real estate was overpriced. If I remember correctly, he told me that 40% of all the value of residential real estate in the United States was in California alone. So he tried to get the other principals in the fund to buy puts on the stocks of banks that were heavily invested in California residential mortgages. He couldn't persuade them. He did research to find which bank or banks were most at risk. He found one: Downey Savings and Loan. So he used his own assets to buy a large number of puts on their stock. He made out. He's the only friend I know who had a substantial amount of wealth and didn't lose net wealth when the crisis hit.