Real Estate Funds Continue to Flop

As the major market indices languish in bear-market territory, the message from U.S. real estate sector mutual funds is, "What took you so long?"

The Dow Jones U.S. Real Estate Index hit this double decimation level back in July 2007. With this week's trading, the index is closing in on a decline of 40% from the heady days of February 2007.

While U.S. homes are getting more affordable, potential buyers are expecting to find even better deals this time next year. The declining home values and upwardly resetting teaser interest rates have mortgage borrowers walking away, leaving home loan guarantors with as much as $77 billion in undeclared losses.

The worst-performing real estate fund for the 5-trading-day period ending Thursday, July 10 is the Fidelity Select Home Finance Portfolio(FSVLX Quote - Cramer on FSVLX - Stock Picks), which shed 9.36%. The fund is allocated to 32.9% savings & loans, 32.4% brokers, 15.1% banks and 12.9% real estate investment trusts, or REITS.

Nearly one-quarter of Fidelity Home Finance's net assets are split between its two largest holdings, Freddie Mac(FRE Quote - Cramer on FRE - Stock Picks), which crashed 44.83%, and Fannie Mae(FNM Quote - Cramer on FNM - Stock Picks), which plummeted 29.71%.

Another holding, IndyMac Bancorp(IMB Quote - Cramer on IMB - Stock Picks), fell 53.73%. The company announced it would lay off 53% of employees. Speculation of insolvency and the potential for government takeovers can't be good for these stocks.

Editor's note: Late Friday, federal regulators seized IndyMac.

The second worst performer, Alpine Global Premier Properties Fund(AWP Quote - Cramer on AWP - Stock Picks), also a holder of Fannie, focuses mostly on REITS, Real Estate and lodging companies. This was not the week for hotel stocks, with Orient-Express Hotels(OEH Quote - Cramer on OEH - Stock Picks) off 24.70% and Ashford Hospitality Trust(AHT Quote - Cramer on AHT - Stock Picks) off 13.62%.

Two of the 10 worst performers, FocusShares ISE Homebuilders Index Fund(SAW Quote - Cramer on SAW - Stock Picks), down 7.35%, and iShares Dow Jones US Home Construction Index Fund(ITB Quote - Cramer on ITB - Stock Picks), down 6.24%, are betting on growth in new home construction.

At a time when housing inventories are stacking up and pending home sales for the month of May trailed April by 4.7%, home construction funds may lack a solid foundation from which to build value.

Some of the worst housing performers this week were Beazer Homes USA(BZH Quote - Cramer on BZH - Stock Picks), down 21.66%; Woodbridge Holdings(WDG Quote - Cramer on WDG - Stock Picks), down 19.82%; and Brookfield Homes(BHS Quote - Cramer on BHS - Stock Picks), down 18.75%.

Worst Performing Real Estate Funds for the Week Ending Thursday July 10
Fund	Ticker	Rating	Fund Type	1 Week Total Return
Fidelity Select Home Finance Portfolio	FSVLX	E-	Open-End	-9.36%
Alpine Global Premier Properties Fund	AWP	E	Closed-End	-7.45%
RMR Preferred Dividend Fund	RDR	E	Closed-End	-7.37%
FocusShares ISE Homebuilders Index Fund	SAW	U	ETF	-7.35%
DWS RREEF Real Estate Fund II Inc	SRO	C-	Closed-End	-7.33%
RMR Hospitality and Real Estate Fund	RHR	D-	Closed-End	-7.00%
iShares Dow Jones US Home Construction Index Fund	ITB	E-	ETF	-6.24%
Nuveen Real Estate Income Fund	JRS	C-	Closed-End	-6.21%
iShares FTSE NAREIT Mortgage REITs Index Fund	REM	E-	ETF	-5.78%
Alpine US Real Estate Equity Fund	EUEYX	E-	Open-End	-5.47%
Source: Bloomberg & TheStreet.com Ratings

The best-performing real estate fund, Claymore/AlphaShares China Real Estate ETF(TAO Quote - Cramer on TAO - Stock Picks) gained 6.84% this week by completely avoiding the U.S. real estate market. Instead, the fund has 90.8% Hong Kong securities, along with 8.4% Chinese and 0.8% Singaporean stocks.

While any gain is a good thing, the small rebound barely registers on the longer-term downtrend in Hong Kong real estate.

The same holds true for the tiny upward move of 1.52% for ING Asia-Pacific Real Estate Fund(IAPAX Quote - Cramer on IAPAX - Stock Picks). The fund diversifies the 31.5% Hong Kong REIT & real estate holdings with 29.9% from Japan, 27.2% from Australia, and 10.6% from Singapore, but this has not prevented significant long-term losses for fund shareholders of as much as 30% from late last year.

Best Performing Real Estate Funds for the Week Ending Thursday July 10
Fund	Ticker	Rating	Fund Type	1 Week Total Return
Claymore/AlphaShares China Real Estate ETF	TAO	U	ETF	6.84%
ING Asia-Pacific Real Estate Fund	IAPAX	U	Open-End	1.52%
Fidelity International Real Estate Fund	FIREX	C+	Open-End	1.42%
Fidelity Advisor International Real Estate Fund	FIRAX	D	Open-End	1.42%
Adelante Shares RE Yield Plus Exchange-Traded Fund	ATY	U	ETF	1.41%
JPMorgan International Reality Fund	JIRAX	U	Open-End	1.37%
iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund	IFGL	U	ETF	1.34%
iShares FTSE EPRA/NAREIT Asia Index Fund	IFAS	U	ETF	1.31%
Morgan Stanley Institutional Fund Inc - Global Real Estate Portfolio	MRLAX	U	Open-End	1.30%
EII International Property Fund	EIIPX	C+	Open-End	0.92%
Source: Bloomberg & TheStreet.com Ratings

The news in real estate is not universally bad. The silver lining is that the glut-induced drop in home prices has pushed some buyers off the sidelines. Purchase applications to buy or refinance, as measured by a Mortgage Bankers Association index, gained 7.5% for the week ending July 4.

This week, Treasury Secretary Paulson, President Bush and Senate Banking Committee Chairman Dodd assured the investing public that everything is under control and that the contingency plans in place currently avoid nationalizing Fannie and Freddie. Any bailout that turns Fannie debt securities into U.S. Treasuries would help to stabilize the mortgage debt market and U.S. banking system. The penalty for that would be a lower credit rating for the U.S. government, or at least a weaker U.S. dollar, which would trigger more inflation.

If Fed Chief Bernanke does allow Fannie Mae and Freddie Mac to borrow from the discount window to raise capital, it will be a half step in the direction of a bailout.

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