Homebuilders Bulldoze Real Estate Funds

Homebuilders are suffering under a heavy debt load while falling existing-home prices push up the inventory level of new, unsold homes.

Billionaire Carl Icahn's WCI Communities (WCI Quote) had its share price halved again this week as investors anticipated that the company might have to file for bankruptcy if it can't borrow again in order to avoid defaulting on its $1.9 billion in debt. The decline comes after the stock had already lost more than 90% of its value in the last year.

Shares of other homebuilders followed suit, unnerved by another weak reading on the housing market. With pending home sales falling 2.6% in November, according to the National Association of Realtors' index, the supply of previously owned homes is up to 10.3 months worth of home sales.

Excluding the two funds that short the real estate sector, the shifting economic sands eroded 3.56% from the average fund over the five trading days ending Thursday. The falling shares prices of homebuilders have real estate funds, centered on that niche, sinking in quicksand.

Topping the worst-performer list this week is the brand new FocusShares ISE Homebuilders Index Fund (SAW Quote). This exchange-traded fund lived up to its ticker symbol and sawed off 19.95% of its value for the week ending Jan. 10. The fund, with an inception date of Nov. 30, began trading on Dec. 4.

The middle of a real estate recession may not have been the best time to start an ETF with large holdings of Toll Brothers (TOL Quote), off 8.34%; D.R. Horton (DHI Quote), off 8.31%; Centex (CTX Quote), off 10.46%; and Lennar(LEN Quote), off 12.02%.

At least the prospectus for FocusShares ISE Homebuilders Index Fund does warn of interest rate fluctuation, mortgage capital availability, consumer confidence, and new- and existing-home sales risks. These aren't just risks. They are the down-to-earth reality.

The significantly more liquid iShares Dow Jones US Home Construction Index Fund (ITB Quote) fell half as much, with a one-week return of negative 10.10%, securing the second spot on our list of worst-performing real estate funds.

Both funds hold a similar pool of companies. The stocks sinking into the quicksand the fastest include WCI Communities, down 54.26%, Meritage Homes (MTH Quote), down 31.49%; Beazer Homes (BZH Quote), down 18.51%, and Brookfield Homes (BHS Quote), down 13.54%.

Worst-Performing Real Estate Funds Ranked by returns for the week ending January 10
Fund	Ticker	Rating	Fund Type	1 Week Total Return
FocusShares ISE Homebuilders Index Fund	SAW	U	ETF	-19.95%
iShares Dow Jones US Home Construction Index Fund	ITB	E-	ETF	-10.10%
iShares FTSE EPRA/NAREIT Europe Index Fund	IFEU	U	ETF	-8.29%
iShares FTSE NAREIT Real Estate 50 Index Fund	FTY	U	ETF	-8.28%
SPDR S&P Homebuilders ETF	XHB	E-	ETF	-8.10%
Adelante Shares RE Classic Exchange-Traded Fund	ACK	U	ETF	-7.65%
Adelante Shares RE Yield Plus Exchange-Traded Fund	ATY	U	ETF	-7.06%
Ultra Real Estate ProShares	URE	U	ETF	-7.00%
Cohen & Steers European Realty Shares Inc	EURAX	U	Open-End	-6.83%
iShares FTSE EPRA/NAREIT North America Index Fund	IFNA	U	ETF	-6.26%
Source: Bloomberg

For an explanation of our ratings, click here.

The top two performers among real estate funds this week both short the Dow Jones U.S. Real Estate Index. The UltraShort Real Estate ProShares (SRSl Quote)used 200% negative leverage to generate a positive return of 5.69%. The (SRPIX Quote)ProFunds Short Real Estate ProFund (SRPIX) increased in value by 3.28% without leverage.

The index member taking the largest hit, down 16.18%, is CB Richard Ellis Group(CBG Quote). This Irish homebuilder ran out of luck, blaming the European Central Bank's doubling of interest rates since 2005 for the first annual decline in home prices in 11 years.

Other double-digit losers this week pushing up the value of short funds include a 12.73% decline in General Growth Properties (GGP Quote), a 12.66% decline in Pennsylvania Real Estate Investment Trust (PEI Quote), a 11.79% decline in Thornburg Mortgage (TMA Quote) and a 10.03% decline in Forest City Enterprises (FCE Quote).

Best Performing Real Estate Funds Ranked by returns for the week ending January 10
Fund	Ticker	Rating	Fund Type	1 Week Total Return
UltraShort Real Estate ProShares	SRS	U	ETF	5.69%
ProFunds Short Real Estate ProFund	SRPIX	U	Open-End	3.28%
Cohen & Steers REIT and Preferred Income Fund	RNP	D	Closed-End	2.35%
Claymore/AlphaShares China Real Estate ETF	TAO	U	ETF	1.96%
RMR Preferred Dividend Fund	RDR	E-	Closed-End	1.86%
iShares FTSE NAREIT Residential Index Fund	REZ	U	ETF	0.74%
Cohen & Steers Quality Income Realty Fund	RQI	E+	Closed-End	0.71%
Cohen & Steers Worldwide Realty Income Fund	RWF	E-	Closed-End	-0.42%
Cohen & Steers REIT and Utility Income Fund	RTU	B-	Closed-End	-0.55%
Kensington Select Income Fund	KIFAX	E	Open-End	-0.55%
Source: Bloomberg

For an explanation of our ratings, click here.

Both President Bush and Treasury Secretary Paulson are pointing toward more pain to come in the real estate market. Their rescue plan, to freeze variable rates for some subprime borrowers, has been able to reach only a small fraction of those who are eligible to be helped.

Also this week, the usual relationship where office and retail development follows building of new residential communities may be playing out in reverse. The year-end office vacancy rate, after four years of contracting, increased to 12.6% for the 79 metropolitan markets measured. At the same time, shopping center vacancies hit an 11-year high. This is one more nail in the recession coffin, as worries of an economic downturn prevent the signing of long-term leases, bringing on a self-fulfilling prophecy.