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3 Reasons To Be Cautios On Real Estate

|Includes: IYR, SPDR Homebuilders ETF (XHB)
 By Kevin Grewal, Editorial Director at
Although existing homes sales rose by an unexpected 9.4% in September, to an annual rate of 5.57 million units, three factors suggest that these levels are unsustainable.
First, the $8,000 first time home buyer credit has made purchasing a home a bit more affordable and a lot more attractive. This tax credit is set to expire and will likely deter many from purchasing their new first home. Some suggest that Congress will extend the tax credit, however this will be difficult after a recent IRS audit of the program unveiled various fraudulent claims including some trying to claim the credit for homes that were not purchased and some claiming to fit the description of a first-time home buyer. 
Secondly, the financial sector, in particularly banks, still remains fragile. It appears that the amount of debt that is still outstanding in the economic system is taking its toll on the banking system. 2009 has been flooded with bank failures as the number of banks to fail has soared past the century mark. The uncertainty of the future repayment of loans to the banking sector as well as the surge in defaults, represented by real estate foreclosure rates, is keeping a tight grip on the credit markets and this is likely to remain a concern for the next 12 to 18 months.
Lastly, there is no real relief in the labor markets in sight. In fact, President Obama has openly stated that unemployment is expected to continue to rise into 2010. Without a job and a secure source of income, a consumer will not be able to obtain a loan. Additionally, those who do have jobs are worried about receiving pink slips and are not spending. 
The real estate sector has seen a nice uptrend, primarily fueled by the aforementioned tax credit and favorable lending rates. The is evident through the performance of the following equities:
·         the SPDR S&P Homebuilders (NYSEARCA:XHB), which is up 68% from its March low of $8.23 to close at $13.83 on Monday.
·         the iShares Dow Jones Real Estate (NYSEARCA:IYR), closing at $40.61 on Monday from its March low of $22.21; an increase of 83%.
When investing in these equities a good way to mitigate the risk that inherently involved is through the use of an exit strategy. According to the latest data from, an upward trend in these ETFs could come to an end at the following price levels: XHB at $13.39 and IYR at $40.65. Keep in mind that these price levels change on a daily basis and updated data can be found at