Homebuilders are suffering under a heavy debt load while falling existing-home prices push up the inventory level of new, unsold homes.

Billionaire Carl Icahn's WCI Communities ( WCI) had its share price halved again this week as investors anticipated that the company might have to file for bankruptcy if it can't borrow again in order to avoid defaulting on its $1.9 billion in debt. The decline comes after the stock had already lost more than 90% of its value in the last year.

Shares of other homebuilders followed suit, unnerved by another weak reading on the housing market. With pending home sales falling 2.6% in November, according to the National Association of Realtors' index, the supply of previously owned homes is up to 10.3 months worth of home sales.

Excluding the two funds that short the real estate sector, the shifting economic sands eroded 3.56% from the average fund over the five trading days ending Thursday. The falling shares prices of homebuilders have real estate funds, centered on that niche, sinking in quicksand.

Topping the worst-performer list this week is the brand new FocusShares ISE Homebuilders Index Fund ( SAW). This exchange-traded fund lived up to its ticker symbol and sawed off 19.95% of its value for the week ending Jan. 10. The fund, with an inception date of Nov. 30, began trading on Dec. 4.

The middle of a real estate recession may not have been the best time to start an ETF with large holdings of Toll Brothers ( TOL), off 8.34%; D.R. Horton ( DHI), off 8.31%; Centex ( CTX), off 10.46%; and Lennar ( LEN), off 12.02%.

At least the prospectus for FocusShares ISE Homebuilders Index Fund does warn of interest rate fluctuation, mortgage capital availability, consumer confidence, and new- and existing-home sales risks. These aren't just risks. They are the down-to-earth reality.

The significantly more liquid iShares Dow Jones US Home Construction Index Fund ( ITB) fell half as much, with a one-week return of negative 10.10%, securing the second spot on our list of worst-performing real estate funds.

Both funds hold a similar pool of companies. The stocks sinking into the quicksand the fastest include WCI Communities, down 54.26%, Meritage Homes ( MTH), down 31.49%; Beazer Homes ( BZH), down 18.51%, and Brookfield Homes ( BHS), down 13.54%.
Worst-Performing Real Estate Funds
Ranked by returns for the week ending January 10
Fund Ticker Rating Fund Type 1 Week Total Return
FocusShares ISE Homebuilders Index Fund SAW U ETF -19.95%
iShares Dow Jones US Home Construction Index Fund ITB E- ETF -10.10%
iShares FTSE EPRA/NAREIT Europe Index Fund IFEU U ETF -8.29%
iShares FTSE NAREIT Real Estate 50 Index Fund FTY U ETF -8.28%
SPDR S&P Homebuilders ETF XHB E- ETF -8.10%
Adelante Shares RE Classic Exchange-Traded Fund ACK U ETF -7.65%
Adelante Shares RE Yield Plus Exchange-Traded Fund ATY U ETF -7.06%
Ultra Real Estate ProShares URE U ETF -7.00%
Cohen & Steers European Realty Shares Inc EURAX U Open-End -6.83%
iShares FTSE EPRA/NAREIT North America Index Fund IFNA U ETF -6.26%
Source: Bloomberg

For an explanation of our ratings, click here .

The top two performers among real estate funds this week both short the Dow Jones U.S. Real Estate Index. The UltraShort Real Estate ProShares ( SRSl)used 200% negative leverage to generate a positive return of 5.69%. The ( SRPIX) ProFunds Short Real Estate ProFund (SRPIX) increased in value by 3.28% without leverage.

The index member taking the largest hit, down 16.18%, is CB Richard Ellis Group ( CBG). This Irish homebuilder ran out of luck, blaming the European Central Bank's doubling of interest rates since 2005 for the first annual decline in home prices in 11 years.

Other double-digit losers this week pushing up the value of short funds include a 12.73% decline in General Growth Properties ( GGP), a 12.66% decline in Pennsylvania Real Estate Investment Trust ( PEI), a 11.79% decline in Thornburg Mortgage ( TMA) and a 10.03% decline in Forest City Enterprises ( FCE).

Best Performing Real Estate Funds
Ranked by returns for the week ending January 10
Fund Ticker Rating Fund Type 1 Week Total Return
UltraShort Real Estate ProShares SRS U ETF 5.69%
ProFunds Short Real Estate ProFund SRPIX U Open-End 3.28%
Cohen & Steers REIT and Preferred Income Fund RNP D Closed-End 2.35%
Claymore/AlphaShares China Real Estate ETF TAO U ETF 1.96%
RMR Preferred Dividend Fund RDR E- Closed-End 1.86%
iShares FTSE NAREIT Residential Index Fund REZ U ETF 0.74%
Cohen & Steers Quality Income Realty Fund RQI E+ Closed-End 0.71%
Cohen & Steers Worldwide Realty Income Fund RWF E- Closed-End -0.42%
Cohen & Steers REIT and Utility Income Fund RTU B- Closed-End -0.55%
Kensington Select Income Fund KIFAX E Open-End -0.55%
Source: Bloomberg

For an explanation of our ratings, click here .

Both President Bush and Treasury Secretary Paulson are pointing toward more pain to come in the real estate market. Their rescue plan, to freeze variable rates for some subprime borrowers, has been able to reach only a small fraction of those who are eligible to be helped.

Also this week, the usual relationship where office and retail development follows building of new residential communities may be playing out in reverse. The year-end office vacancy rate, after four years of contracting, increased to 12.6% for the 79 metropolitan markets measured. At the same time, shopping center vacancies hit an 11-year high. This is one more nail in the recession coffin, as worries of an economic downturn prevent the signing of long-term leases, bringing on a self-fulfilling prophecy.
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.