The real estate sector and its related exchange traded funds (ETFs) appear to be making a recovery, but there are still some potential stumbling blocks the sector could likely face in the coming months.

David Merkel for Green Faucet has notes on residential real estate and some upcoming :

1. Principal Forgiveness. Principal forgiveness means that a loss has to be taken by someone.  Adjust the rate, adjust the term, adjust the amortization – it is all tinkering, even if it lowers the payment slightly, because the owner is still inverted on his mortgage.
2. A Second Foreclosure Wave. Or will the ongoing foreclosures just be a continuation of what has been going on in the real estate market?
3. Government-Sponsored Enterprises. The GSE’s such as Fannie and Freddie are still in bad shape. Stay away from these companies, Merkel says.
4. Homeowners Upside Down. Percentage of homeowners upside down or underwater: 24-32% now and soon, 30% soon, 32% are now, and 48% will be in two years.
5. Prices. Home prices are still sagging and there are not a lot of move-up buyers, mostly only people looking for steals.

These are some of the reasons residential real estate may be slow to recover. The beginning of the end may be near, but we won’t know until an actual turnaround starts.

Many analysts and economists believe that the real estate market is the backbone to the the financial markets, and there will not be a financial recovery until the real estate market is sound.

• iShares FTSE NAREIT Residential Plus Cp Index (REZ): up 4.2% year-to-date

For more stories about real estate, visit our real estate category.

Tags: Asset Class ETFs, Real Estate, REZ, Sector ETFs