Homebuilder Funds Dive, Inverses Thrive

Awful home-sale data cause further damage among funds in the real estate sector.
By Kevin Baker ,

Homebuilder funds topped our list of worst-performing real estate funds this week. As a group, excluding the funds that short the sector, the real estate funds we track lost 3.95% of their value for the week ending Thursday, May 22.

For the month of April, existing home sales decline 1.0% from March. The annual sales pace of previously owned homes slowed to 4.89 million units, which ties the nine-year low set in January.

In a horrible environment for homebuilders, the supply of unsold homes is also at a record high. With 4.55 million of these homes available, it would take 11.2 months, at the current sales rate, to absorb this supply. That's another record, up from 10 months in March.

Potential buyers watched the purchase price of homes fall 0.2% in the first quarter. The median price for existing homes is at $202,300, off 8% from April 2007. The risk of buying now is that prices will almost certainly be lower next month.

The fund listed as the worst performer this week is the

Phocas Real Estate Fund

(PHREX)

. The reported net asset value of this fund dropped 19.99%. The holdings of this fund falling the furthest were

General Growth Properties

(GGP)

at -8.13%,

Prologis

(PLD) - Get Report

at -6.62%,

Simon Property Group

(SPG) - Get Report

at -5.90%, and

Sunstone Hotel Investors

(SHO) - Get Report

at -5.82%.

Kevin Granger, a portfolio manager for Phocas Financial, explained to me that the fund was forced to liquidate its portfolio on Monday and buy the positions back on Tuesday to adjust the ownership structure and expense ratio.

Instead of -19.99%, Mr. Granger quoted that the portfolio value should have only fallen 5.83% before fees over the same period, citing a "rare mispricing error" at US Bancorp yet to be resolved.

US Bancorp didn't respond to a request for comment. If you already own this fund and were planning to sell it, consider waiting a few days for a resolution of this pricing problem.

The actual worst performers are the three exchange-traded funds covering the homebuilders:

FocusShares ISE Homebuilders Index Fund

( SAW) at -13.27%,

iShares Dow Jones US Home Construction Index Fund

(ITB) - Get Report

at -11.87%, and

SPDR S&P Homebuilders ETF

(XHB) - Get Report

at -9.80%. Common holdings to all three fund include:

Beazer Homes USA Inc

(BZH) - Get Report

, off 24.79%;

KB Home

(KBH) - Get Report

, off 17.33%;

Standard Pacific Corp

(SPF)

, off 15.77%,

Lennar Corp

(LEN) - Get Report

, off 15.41%, and

Centex Corp

(CTX)

, off 15.34%.

The plunge from Beazer can be directly attributed its report of a second consecutive quarterly loss, $229.9 million in March on top of the $138.2 million from the December quarter end. Beazer CEO Ian McCarthy does not see home prices rebounding this year with continued weak housing demand.

The SPDR also invests in home furnishing stocks like

Lowe's

(LOW) - Get Report

and

Home Depot

(HD) - Get Report

, which have both guided analyst estimates lower as cash-strapped homeowners, feeling the economic pinch, put off remodeling projects to save money for necessities like food and fuel. The shares are down 6.68% and 8.87% respectively this week.

The two funds built to buck this trend are inversely indexed to the daily returns of the Dow Jones U.S. Real Estate Index.

UltraShort Real Estate ProShares

(SRS) - Get Report

turned 200% negative leverage into a gain of 9.44%, while the unleveraged

ProFunds Short Real Estate ProFund

(SRPIX) - Get Report

added 4.87%.

Friedman Billings Ramsey Group

(FBR)

, down 10.92%;

Maguire Properties

(MPG)

, down 9.37%; and

Healthcare Realty Trust

(HR) - Get Report

, down 9.32% took the worst of the damage.

The third-place fund,

Cohen & Steers Quality Income Realty Fund

(RQI) - Get Report

bucked the downtrend due to having about one-fifth of its portfolio in preferred shares generating a steady yield. The largest concentration of preferred shares in this closed-end fund are those of

Public Storage

(PSA) - Get Report

, at 4.48% of assets.

According to RealtyTrac's April statistics, one out of every 519 homes in the U.S. entered foreclosure, up 65% from April 2007 beating last month by 4 points. Nevada has it the worst with 1-in-146 home foreclosures, with California at 1-in-204, Arizona at 1-in-224, and Florida at 1-in-242. Until these rates slow, looking for a bottom in real estate is premature.

For an explanation of our ratings,

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Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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