New Real Estate Funds Crash and Burn

Editor's note: This is the first of five stories looking at the past year and at the year ahead in mutual funds and exchange-traded funds.

It may be the end of 2007, but mutual funds have been partying like it's 1999.

Let's hope investors don't experience a hangover like the one from 2000 to 2002.

As with the onslaught of new technology funds just before the Internet bubble popped, the industry has rolled out a slew of funds that invest in real estate investments at the worst possible time.

Forty real estate funds debuted this year, nearly double the 22 that were launched in 2006. These numbers include both domestic and global mutual funds as well as exchange-traded funds.

The timing couldn't have been worse. As last week's release of the S&P/Case-Shiller Home Price Indices illustrates, the housing rally is over. According to this leading measure of U.S. home prices, October was the 10th consecutive month of negative annual returns in the prices of existing single-family homes, and the 23rd consecutive month of decelerating returns.

The 10-City Composite Index's annual decline of 6.7% was a record low. The previous record was 6.3% tumble in April 1991. In October, the 20-City Composite recorded an annual decline of 6.1%.

No surprise, real estate is the worst-performing Morningstar fund category for the year to date, down 12.9% through Nov. 30.

The number of REIT funds that were rolled out this year isn't as high as the 113 tech funds that debuted in 2000, the year the tech bubble burst, according to Lipper.

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