Too Soon to Bank on Real Estate Funds

Real estate funds rose last week on industry optimism that might be premature.
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Exchange traded funds that invest in

real estate

jumped 4% last week amid early signals of a potential housing recovery and optimism generated by the government's plan to buy $1 trillion of troubled bank assets.

While these positive developments suggest that happy times are here again, investors might be wise to wait for stronger signs that

real estate

is on the upswing. Homebuilders, which rely on sales of newly constructed homes, might face a prolonged recovery as the glut of cheap properties for sale shrinks. In addition, cut-rate prices will reduce revenue and put downward pressure on margins.

The

iShares Dow Jones U.S. Home Construction Index Fund

(ITB) - Get Report

and the

SPDR S&P Homebuilders ETF

(XHB) - Get Report

were the top-performing ETFs in the category, rising 14% and 13%, respectively. The S&P 500 Index advanced 6.2% during the same period. The funds have lost more than 45% in the past year.

ETFs that invest in homebuilders benefited from industrywide stock gains.

KB Home

(KBH) - Get Report

energized investors last week with a lower-than-expected quarterly loss. The company's shares increased 27% last week.

Shares of rival

Ryland Group

(RYL)

climbed 20% during the period.

Toll Brothers

(TOL) - Get Report

rose 11%. The three stocks have lost more than 10% in the past year.

For more information, check out an

explanation of our ratings

.

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.