You have to take a look at the risks:
- You pick poorly, and only your house fails to make a profit.
- The entire area suffers a drop in prices
- The entire country suffers.
A REIT or REIT index will not help in the 2nd and 3rd cases. The loses are too broad.
The losses can be paper only for many people until they need to sell. In fact the only time there might be losses is when you need to sell. Many people lost money on paper when the last bubble burst, in fact they were giving back paper gains. The people that lost the most were those that had to sell. Their house was dropping and they found it hard to sell at any price. The market changed. It went from anything could sell in days; to nothing would sell for months.
Renting the house doesn't protect you. If your monthly costs are greater the rental income, you will be losing real dollars every month. Yes I know there is deprecation, which can help with taxes, but even that can't help all rental properties or ensure you can sell when you need to.
How much of a hedge would you need to protect you from more than $100K of potential losses?
The alternative is not to buy, just rent. You can move after every lease. Of course risks involved with renting still exist. If the prices are rising they sometimes bring the rents up with them.
The best approach is to buy a house that meet your needs for as long as long a window as possible. Don't buy so much that the required payments stretch you too thin. Over time the monthly costs should become a smaller portion of your income. That is how you protect yourself.