Is Real Estate on the Road to Recovery?
By Ron DeLegge, Editor
July 29, 2009

SAN DIEGO (ETFguide.com) – U.S. home prices may be stabilizing according to latest figures reported by the Standard & Poor’s Case Shiller index. But before you uncork the champagne, it’s still too early to conclude “the worst is over.” 

Home prices from the period of April to May rose or remained unchanged in 15 out of 20 cities. The Case Shiller index tracks the performance of home prices in 20 U.S. metropolitan areas.

While the housing market’s easing declines are a positive development, it would be a mistake to conclude we’ve reached a bottom based upon one-month of data. Look no further than the sagging prices in luxury real estate.  

According to the July issue of Vanity Fair, the high end real estate market in the Hamptons have deteriorated so badly, a “25 percent off the asking price is where the haggling begins, not ends.” Real estate prices in the posh Hamptons have long been a benchmark of Wall Street’s health and right now things look grim.

Real estate can generally be divided into two segments: Residential and commercial property.

Let’s examine a few key real estate ETFs closely tied to property prices.

Vanguard REIT ETF (NYSEArca: VNQ)
The performance and yield of VNQ is linked to the MSCI US REIT, a broad measure of real estate stocks. The index includes publicly traded real estate companies involved in owning and managing properties such as apartments, retail, office, and industrial space. Mortgage REITs are excluded from VNQ and the fund has $2.1 billion in assets.

Year-to-date*, VNQ has declined 4.51%. VNQ currently carries a yield of around 8.6%. In 2008, VNQ retreated 37.04% and the fund’s annual expense ratio is 0.12%. 

iShares FTSE NAREIT Residential Index Fund (NYSEArca: REZ)
This REIT ETF follows the FTSE NAREIT Residential Index. The index currently owns 32 REITs and it’s designed to measure the performance of the residential real estate sector of the United States equity market. Top holdings include Public Storage, HCP and Equity Residential.

Year-to-date REZ has fallen 9.14%. REZ currently carries a yield of around 8.8%. In 2008, REZ declined 25.27% and the fund’s annual expense ratio is 0.48%. 

SPDR S&P Home Builders ETF (NYSEArca: XHB)
XHB follows the S&P Homebuilders Select Industry. Top holdings in this homebuilders ETF include Home Depot, Bed Bath & Beyond, and Sherwin Williams. All index holdings are equal weighed at the beginning of each quarter and then float with the market for the rest of the quarter. XHB currently owns 27 homebuilding stocks.

Year-to-date XHB has gained 16.83%. In 2008, XHB fell 36.19% and the fund’s annual expense ratio is 0.35%. 

Direxion Daily Real Estate Bull 3x Shares (NYSEArca: DRN)
This super-charged leveraged ETF is designed as a short-term trading instrument for investors that are bullish on the price of real estate stocks. DRN attempts to deliver 300% the daily performance of the MSCI U.S. REIT Index. The fund’s annual expense ratio is 0.95%.

Direxion Daily Real Estate Bear 3x Shares (NYSEArca: DRV)
This leveraged ETF is designed as a short-term trading instrument for investors that are bearish on the price of real estate stocks. DRV attempts to deliver 300% the daily inverse performance of the MSCI U.S. REIT Index. The fund’s annual expense ratio is 0.95%.

Both DRN and DRV were just introduced and therefore have a limited performance history.

Conclusion
Even though year-over-year U.S. home prices through May 2009 have posted a decline of 17%, the shorter-term monthly data seems be showing a more positive picture for housing.  

No doubt, this upbeat trend led Robert Shiller, co-creator of the S&P/Case Shiller Home Price Index and Yale University economist, to say the following in a recent interview with Bloomberg: “At this point, people are thinking the fall is over. The market is predicting the declines are over.”

Before you agree, you should ask: Did real estate prices really bottom? Should you buy? Or should you sell? Further analysis of real estate prices were recently explored in a research piece by Simon Maierhofer.

*Performance figures through market close of July 28, 2009