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TheStreet Open House

ETFs for Playing the Housing Recovery

By Kevin Grewal, Editorial Director at www.SmartStops.net

NEW YORK ( TheStreet) -- Over the past few months, the real estate sector has been outperforming analysts' expectations and pleasantly surprising investors. The recovery has also boosted exchange-traded funds that track the sector.

Investors should keep in mind, however, that there are plenty of signs to indicate that these gains are not sustainable or representative of the real health of the sector.

Most recently, the National Association of Realtors reported that existing-home sales increased 10.1% in October over the previous month, on a seasonally adjusted basis. On the surface, this is great news, because home sales traditionally increase in the first half of the year and decline in the second half.

However, this deviation from history has likely been caused by the $8,000 first-time homebuyer tax credit implemented by the Obama Administration. The credit was originally set to expire on Nov. 30, and some experts say that deadline caused many people to rush to complete purchases that they wouldn't have made without the tax credit.

The influx of home buyers has pushed supply and demand closer to equilibrium levels, which has had a positive effect on home prices. The S&P Case-Schiller index, which measures housing prices in 20 major U.S. metropolitan areas, rose by 0.3% to a reading of 144.96 in September. This was the fourth straight monthly increase.

However, there are sources of concern in the latest S&P Case-Shiller report. Of the 20 cities measured, only 11 indicated month-over-month increases. In previous months, larger numbers of cities reported higher prices. Also, on a year-over-year basis, overall prices are still down slightly more than 9%.

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