NEW YORK (TheStreet) -- Navigating the real estate market in today's trying economy takes a strong stomach and a vigilant eye. While the going will certainly be rocky, some slices of the industry hold more promise than others.

This week, investors have had a finger on real estate's pulse as a number of industry leaders reported their earnings reports and a spattering of real estate-related economic data points are released. While my views of the broad economy are generally optimistic, I continue to have reservations towards certain sections of the real estate industry.

Home builders, in particular, remain on my list of areas for long-term investors to avoid.

A strong earnings report from

Lennar

(LEN) - Get Report

and an encouraging housing starts report painted a rosy picture for the homebuilder industry at the start of the week. However, at this point I would not be a buyer of ETFs such as

iShares Dow Jones U.S. Home Construction Index Fund

(ITB) - Get Report

and

SPDR S&P Homebuilder ETF

(XHB) - Get Report

.

Home builders such as Lennar and

Hovnanian

(HOV) - Get Report

did well during the first part of the year thanks to an uptick in demand.

Unfortunately, as time has passed, it has become increasingly apparent that much of this momentum stemmed from government incentives. Since these incentives were disbanded at the start of the summer, these companies and ETFs designed to track the homebuilders have tumbled, struggling to regain traction.

Today, although many areas of the market are recovering, when it comes to residential real estate, oversupply remains a big issue weighing on the long-term prospects for this industry. Ultimately, I will have trouble constructing a strong case for long term stability in XHB and ITB until the number of unbought houses decreases.

Although I am less than optimistic towards the residential real estate industry, commercial real estate and REITs could be more promising areas of focus for risk tolerant investors. Therefore I am far more confident in the prospects for funds such as

iShares Cohen & Steers Realty Majors Index Fund

(ICF) - Get Report

).

Amid the turmoil in the real estate industry, REITs have been paying down debt and raising cash. This has helped ICF, which tracks a basket of large liquid real estate investment trusts, to handedly outperform the broad market in 2010. This is a trend I expect will continue heading into the medium term.

Aside from their dramatic out performance versus the broad market, REITs are particularly appealing due to the comfortable distributions they pay out to investors. The yields on ICF and fellow REIT ETF,

iShares NAREIT Residential Plus Capped Index Fund

(REZ) - Get Report

are 3.0% and 3.1% respectively. Comparatively, the dividend paid by XHB and ITB are 0.8% and 0.7% respectively. The yields offered by ICF and other REIT ETFs are ideal for investors looking to take on some risk as well as earn some consistent returns.

Looking ahead, while I feel particularly more optimistic towards REITs, I expect choppy performance to come from all areas of the real estate market. Therefore, investors should prepare themselves for the possibility of seeing swings both lower and higher as we continue along the road to recovery.

-- Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management was long the iShares Cohen & Steers Realty Majors Index Fund.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.