Mixed Week for Real Estate Funds

It was a bad week for homebuilders. Not only are banks tightening credit standards, dooming potential home sales, but home prices are still falling, which means would-be home buyers have every incentive to wait and see if they can get a better deal.

On Tuesday, the National Association of Realtors reported that sales of existing homes were at their lowest level since August 2002, sinking another 4.3% in August to an annual rate of 5.5 million homes.

We now have a record number of homes for sale. It would take 10 months, the longest period on record, to work through the supply of homes at the current sales rate.

The inability to sell existing homes has washed away the foundation below U.S. homebuilders trying to sell new homes.

On Thursday, the Commerce Department's measure of new-home sales declined 8.3% in August to an annual rate of 795,000 homes, the slowest pace since June 2000.

The two real estate funds absorbing the most damage this week are both directly tied to the U.S. homebuilder market.

The iShares Dow Jones US Home Construction Index Fund(ITB Quote) fell 9.86% over the five business days ending Thursday, while the SPDR S&P Homebuilders ETF (XHB Quote) sank 7.79%.

Two stocks common to both funds were hit especially hard.

In order to keep up with payments on its $1.25 billion in outstanding loans, Standard Pacific Corp (SPF Quote) suspended its dividend , saving $10 million annually, and announced plans to sell $115 million in convertible bonds. Its share price was slashed by 31.03% for the five trading days under review.

Also, Beazer Homes (BZH Quote) gave back 17.74% in anticipation of being booted out of the S&P Mid Cap 400 Index Friday.

What's bad for builders could be good for real estate investment trusts. If borrowing costs and home prices are both expected to fall, it truly may be a buyers' market for the next several years. That means companies in the business of borrowing money to buy properties in order to collect rent may do just fine.

The closed-end fund topping our best performing list, (IIA Quote)ING Clarion Real Estate Income Fund (IIA), added 5.96% on solid performances from holdings such as SL Green Realty (SLG Quote), up 7.35%; and Liberty Property Trust (LRY Quote), up 5.94%. The fund allocates 85.7% to REITs and just 2.1% to homebuilders, all of which are U.S. companies.

Using a similar investment strategy, but with an international focus, the (IGR Quote)ING Clarion Global Real Estate Income Fund (IGR) gained 5.65%. The closed-end fund allocates 48% of assets to the U.S., 11.5% to Australia, 9.0% to the Netherlands, 7.7% to Canada and 6.7% to the U.K. The three holdings contributing the most to its performance this week were all Japanese: Japan Retail Fund Investment Corp. was up 15.39%, Mitsubishi Estate Co. was up 12.92%, and Mitsui Fudosan rose 12.58%.

Japan could serve as example of just how long a deflationary spiral for real estate can last in a developed country. Earlier this year Japan's Ministry of Land, Infrastructure and Transport announced that nationwide residential property prices for 2006 rose 0.1%. This was the first annual increase in 16 years.

On Tuesday, the S&P/Case-Shiller Home Price index was released, showing a 3.9% decline in home prices in 20 U.S. metropolitan areas for the 12 months through July. The index peaked back in July 2006, so by this measure we are just one year into our own real estate dilemma. Nationwide median existing-home sales prices have stagnated for two years.

The U.S. Federal Reserve's mission is to both maintain price stability and sustain economic growth. Hopefully, easier monetary policy will encourage more lending, arresting expectations for a further decline in property values. We can either refinance our way out of trouble over the next two years or brace for a protracted decline in home prices.

And falling home prices will further undercut consumer confidence, hastening a recession.

New Home Sales

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Source: TBA

Worst-Performing Real Estate Funds Ranked by returns for the week ended September 27
Fund	Ticker	Rating	Fund Type	1 Week Total Return
iShares Dow Jones US Home Const Index Fund	ITB	E-	ETF	-9.86%
SPDR S&P Homebuilders ETF	XHB	E-	ETF	-7.79%
UltraShort Real Estate ProShares	SRS	U	ETF	-2.97%
iShares FTSE NAREIT Mortgage REITs Index Fund	REM	U	ETF	-2.66%
Neuberger Berman Real Estate Income Fund Inc	NRL	C	Closed-End	-2.34%
Fidelity Select Home Finance Portfolio	FSVLX	E-	Open-End	-1.46%
Alpine Global Premier Properties Fund	AWP	U	Closed-End	-1.46%
ProFunds Short Real Estate ProFund	SRPIX	U	Open-End	-1.45%
RMR Preferred Dividend Fund	RDR	E-	Closed-End	-1.16%
iShares FTSE NAREIT Retail Index Fund	RTL	U	ETF	-1.10%
Source: Bloomberg

Read here for an explanation of our ratings.

Best Performing Real Estate Funds Ranked by returns for the week ended September 27
Fund	Ticker	Rating	Fund Type	1 Week Total Return
ING Clarion Real Estate Income Fund	IIA	C	Closed-End	5.96%
ING Clarion Global Real Estate Income Fund	IGR	B-	Closed-End	5.65%
JPMorgan International Reality Fund	JIRAX	U	Open-End	5.32%
CGM Realty Fund	CGMRX	C	Open-End	4.51%
Cohen & Steers International Realty Fund Inc	IRFAX	U	Open-End	4.44%
DFA International Real Estate Securities Portfolio	DFITX	U	Open-End	4.39%
SPDR DJ Wilshire International Real Estate ETF	RWX	U	ETF	4.26%
ING Global Real Estate Portfolio	IRGIX	U	Open-End	4.23%
AIM Global Real Estate Fund	AGREX	U	Open-End	4.14%
iShares S&P World ex-U.S. Property Index Fund	WPS	U	ETF	4.12%
Source: Bloomberg