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Rough Water for Real Estate ETFs

Stocks in this article: XHB ITB IYR

NEW YORK ( TheStreet) -- Demand for housing has taken a major hit, evident by the record 17% decline in existing-home sales recorded in December.

Many observers suggest that downward price pressures are imminent.

According to the S&P/Case-Shiller Home Price Index, home prices have gained roughly 4% from their 2009 lows. Although this appears promising, and the index has been moving in the right direction, there are plenty of market forces that likely will work against the index and bring prices down.

First, inventory levels remain elevated and are likely to trend upward. According to the National Association of Realtors, the monthly supply of existing homes increased nearly 11% to 7.2 months in December 2009 from November 2009. These numbers are much lower than inventory numbers witnessed a year earlier, but they remain well above the six-month threshold.

To add to the inventory woes, foreclosures are expected to flood the market. Some real estate experts suggest that nearly 2 million foreclosures will take place in 2010 as the backlog in distressed properties is released. This will put downward price pressures on existing homes and increase inventories.

From a lending perspective, mortgage rates have been driven down by the Fed's decision to keep interest rates at exceptionally low levels. Although this is great for mortgage seekers, lending still remains relatively tight, and these favorable rates are generally only available to those who have hefty down payments and high credit scores.

To make things even worse, an optimistic economic assessment released by the Federal Reserve yesterday failed to repeat its assertion that the housing market is improving.

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