ETFs for Playing the Housing Recovery

By Kevin Grewal, Editorial Director at www.SmartStops.net

NEW YORK ( TheStreet) -- Over the past few months, the real estate sector has been outperforming analysts' expectations and pleasantly surprising investors. The recovery has also boosted exchange-traded funds that track the sector.

Investors should keep in mind, however, that there are plenty of signs to indicate that these gains are not sustainable or representative of the real health of the sector.

Most recently, the National Association of Realtors reported that existing-home sales increased 10.1% in October over the previous month, on a seasonally adjusted basis. On the surface, this is great news, because home sales traditionally increase in the first half of the year and decline in the second half.

However, this deviation from history has likely been caused by the $8,000 first-time homebuyer tax credit implemented by the Obama Administration. The credit was originally set to expire on Nov. 30, and some experts say that deadline caused many people to rush to complete purchases that they wouldn't have made without the tax credit.

The influx of home buyers has pushed supply and demand closer to equilibrium levels, which has had a positive effect on home prices. The S&P Case-Schiller index, which measures housing prices in 20 major U.S. metropolitan areas, rose by 0.3% to a reading of 144.96 in September. This was the fourth straight monthly increase.

However, there are sources of concern in the latest S&P Case-Shiller report. Of the 20 cities measured, only 11 indicated month-over-month increases. In previous months, larger numbers of cities reported higher prices. Also, on a year-over-year basis, overall prices are still down slightly more than 9%.

On the bright side, the government has extended the tax credit until next April, mortgage rates are low and prices are attractive relative to their highs during the housing boom.

In the long run, however, one force will drive the sector: employment. The U.S. unemployment rate must decline in order for real estate to continue to recover. Buyers have to have a steady income in order to obtain a mortgage, and current homeowners need to hold on to their jobs to prevent foreclosures from increasing.

The following equities have benefited from the recent uptrend in real estate but could suffer if employment doesn't improve enough to keep the recovery going.

SPDR S&P Homebuilders ( XHB), up 77% from a March low of $8.23 to close at $14.58 on Tuesday.

iShares Dow Jones US Home Construction ( ITB), up 80% from a March low of $6.48 to close at $11.64 on Tuesday

iShares Dow Jones US Real Estate ( IYR), up 93% from a March low of $22.21 to close at $42.90 on Tuesday.

With the extension of the tax credit and favorable lending rates, a short-term opportunity may present itself in the sector, but it is important to keep in mind the risks involved. To help mitigate the effects of volatility and other risks, an exit strategy is important. According to the latest data at www.SmartStops.net, an upward trend in the mentioned equities could come to an end at the following price points: XHB at $14.20 ITB at $11.28 and IYR at $41.93. These price points reflect market changes and change on a daily basis. Updated data can be found at www.SmartStops.net.

-- Written By Kevin Grewal in Laguna Niguel, Calif.

Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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