Rough Water for Real Estate ETFs

NEW YORK ( TheStreet) -- Demand for housing has taken a major hit, evident by the record 17% decline in existing-home sales recorded in December.

Many observers suggest that downward price pressures are imminent.

According to the S&P/Case-Shiller Home Price Index, home prices have gained roughly 4% from their 2009 lows. Although this appears promising, and the index has been moving in the right direction, there are plenty of market forces that likely will work against the index and bring prices down.

First, inventory levels remain elevated and are likely to trend upward. According to the National Association of Realtors, the monthly supply of existing homes increased nearly 11% to 7.2 months in December 2009 from November 2009. These numbers are much lower than inventory numbers witnessed a year earlier, but they remain well above the six-month threshold.

To add to the inventory woes, foreclosures are expected to flood the market. Some real estate experts suggest that nearly 2 million foreclosures will take place in 2010 as the backlog in distressed properties is released. This will put downward price pressures on existing homes and increase inventories.

From a lending perspective, mortgage rates have been driven down by the Fed's decision to keep interest rates at exceptionally low levels. Although this is great for mortgage seekers, lending still remains relatively tight, and these favorable rates are generally only available to those who have hefty down payments and high credit scores.

To make things even worse, an optimistic economic assessment released by the Federal Reserve yesterday failed to repeat its assertion that the housing market is improving.

Additionally, it appears that the extension of the $8,000 first-time homebuyer tax credit didn't give the sector the boost that was so strongly desired.

Lastly, from a macroeconomic perspective, until a sustainable turn in the labor markets emerges, existing-home sales will likely feel downward price pressures.

Some ETFs that should keep these forces in mind include:

The SPDR S&P Homebuilders ( XHB), which holds shares of homebuilders like Pulte Homes ( PHM) and D.R. Horton ( DRH). XHB closed at $15.15 Wednesday.

The iShares Dow Jones US Home Construction ( ITB), which holds shares of homebuilders like Lennar Corporation ( LEN) and NVR ( NVR). ITB closed at $12.34 Wednesday.

The iShares Dow Jones US Real Estate ( IYR), which focuses on commercial real estate holdings like Simon Property Group ( SPG) and Vornado Realty Trust ( VNO) and will likely be indirectly influenced by the housing market. IYR close at $44.14 closed Wednesday.

These ETFs have seen a nice upward trend over the past year, but this could come to an end. To help mitigate the risks involved with investing in them, it's important to use an exit strategy with triggers at price points that represent abnormal price weaknesses.

According to www.SmartStops.net, such price points for these previously mentioned ETFs are: XHB at $14.65; ITB at $11.92; IYR at $43.05. These price points fluctuate on a daily basis and are reflective of market conditions and volatility. 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.

More from ETFs

What Bad Weather? Kohl's Shares Spike as Same-Store Sales Jump

What Bad Weather? Kohl's Shares Spike as Same-Store Sales Jump

Listen: Here's What You Need To Know About ETFs Today (Hint: They're on Fire!)

Listen: Here's What You Need To Know About ETFs Today (Hint: They're on Fire!)

Bitcoin Today: Bears Rear Their Heads as Prices Continue Downward Spiral

Bitcoin Today: Bears Rear Their Heads as Prices Continue Downward Spiral

Cannabis Stocks Are Screaming Sells After Seeing This Deal: Doug Kass Insider

Cannabis Stocks Are Screaming Sells After Seeing This Deal: Doug Kass Insider

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?