Unrealistic assumptions, multiple layers of investors and obscene prices in the commercial real estate market are all part of the reason why the current housing bust is costlier and more complicated than previous ones, comment Mara Der Hovanesian and Dean Foust for BusinessWeek. Average housing prices have already plummeted 41% from the 2007 peak. (Long or short commercial real estate?)

In times past, developers would speed up production to cash in on a real estate bull market, but some defaulted on loans and lenders were stuck with what they financed. What makes this current bust novel is that the oversupply of money from our greedy and eager bank caused our current situation – you may have heard of mortgage-backed securities. “If the cash flow wasn’t there, you had to ignore it or find ways to create it,” remarks a banker at a large Wall Street firm.

Additionally, the wanton lending environment was ideally suited for confidence schemers and swindlers who were able to receive large loans. Loan officers during the credit boom were basically ignoring obvious problems that should have raised red flags.

More than $1.4 trillion in commercial real estate loans will be due between now and 2012. The potential losses or defaults may further dampen lending, and, consequently, impede economic growth. Some feel that if the sector can roll over this debt, REITs and ETFs may be fine. But if they can’t, it’s cause for concern.

Commercial real estate ETFs are trading above their trend lines right now, but watch them closely for any correction and have a stop loss. (How to follow trends).

For more information on the commercial real estate, visit our commercial real estate category. (The benefits of REITs).

• First Trust S&P REIT Index (NYSEArca: FRI): up 17.9% year-to-date

• Vanguard REIT Vipers (NYSEArca: VNQ): up 19.1% year-to-date

• SPDR Dow Jones REIT (NYSEArca: RWR): up 17.8% year-to-date

Max Chen contributed to this article.

The decline in the market should not dissuade any investor from allocating part of their portfolio to real estate, explains Julian Hince for Financial Times.

The benefits of real estate allocation include:

• A stable and steady income stream is possible
• Real estate has a low correlation to equity and fixed-income, giving clear diversification benefits
• Low price volatility is also a plus

Real estate investment trusts (REITs) have been looked at for their liquidity and as an alternative to direct property investment. REITs are publicly traded real estate companies that own, manage and sometimes finance real estate.

A REIT ETF will typically invest in a range of vehicles, offering investors the benefits of instant diversification through one single trade. Investors only need to make one transaction and track one price, but still gain exposure to the entire index at once. This makes them lower maintenance and easy to understand. They make it possible to have small investments in real estate.

For more stories about REITs, visit our REIT category. Among the many REIT ETFs available now:

• First Trust S&P REIT (NYSEArca: FRI): up 19.3% year-to-date
• Vanguard REIT Index ETF (NYSEArca: VNQ): up 20.1% year-to-date
• SPDR Dow Jones REIT (NYSEArca: RWR): up 18.9% year-to-date

Once the commercial property market begins to recover, real estate investment trusts, or REITs, could be the front runner for the asset class. Anton Troianovski for The Wall Street Journal reports that the recovery environment could reflect the 1990s, when many real-estate developers went public to avoid bankruptcy and helped turn real-estate investment trusts into a major force in the property market.

REITs are in a good position to profit from the commercial property bust, but the equity deals that companies made have watered down shareholder stakes in ownership. But this left many REITs in a position to sidestep any loan defaults and benefit when the property market hits trouble.

Meanwhile, hotel shares, which are a staple in REIT investments, have outperformed the broader market. The stocks of hotel companies that are structured as real-estate investment trusts were up 11% during the past three weeks and 34% since the beginning of the year, reports the National Association of Real Estate Investment Trusts.

A.D. Pruitt for The Wall Street Journal reports that such gains far outpace the 6% year-to-date gain for all REITs and the 12% rise by the S&P 500 index. Investors are upbeat about hotel shares because improving credit conditions have allowed some hotel owners and operators to strengthen their balance sheets by refinancing debt or issuing additional stock. Some hotel owners are even walking away from some money pits and giving them to the lenders.

• First Trust S&P REIT Index Fund (FRI): up 10.1% year-to-date

• Dow Jones Wilshire REIT ETF (RWR): up 9.7% year-to-date; hotels are 6.3%

• iShares Cohen & Steers Realty Majors (ICF): up 6.1% year-to-date

For more stories about REITs, visit our REIT category.

REITs own a range of real estate, including office buildings, strip malls and apartment buildings. The sector has a heavy debt load, but if REITs can roll it over, the shares may not suffer. REITs already have rallied about 90% from the 18-year low they hit in March as the drop-off in home prices and economic conditions has slowed, reports Donna Kardos Yesalavich for The Wall Street Journal.

The sector at large saw a huge drop last fall, however, the stocks are anticipated to go nowhere but up if debt refinancings take place. As banks recover more, this is becoming increasingly likely.

Portfolios and managers alike are positive toward REIT shares and ETFs, as they are likely to avoid bankruptcy, and from a technical view, REITs look set to rise as much as 35% from current levels. There are market corrections and pullbacks to be wary of along the way.

• First Trust S&P REIT Index Fund (FRI): up 2.3% year-to-date

• DJ Wilshire REIT ETF (RWR): up 1.4% year-to-date

• iShares Cohen & Steers Realty Majors (ICF): down 0.2% year-to-date

For more stories about REITs, visit our REIT category.

As early as 2008, stories were warning that the commercial real estate market would fall through the floor and that hundreds of billions of dollars of commercial mortgages would default, says Michael Kahn for Barron’s.

Recently, just the opposite has occurred. Commercial real estate investment trusts (REITs) have been soaring over the past few weeks, and the technical indicators have looked prime.

Kahn says that commercial REITs not only rose, but also outperformed the market the during the current summer rally. The sector halted its decline around November 2008, although it did hit a lower low in March, but not by much.

Commercial property tied to consumer spending patterns such as hotels and shopping malls do remain weak, says Ron DeLegge for ETF Guide, and the rental market has a way to go before stabilizing. If a REIT ETF or investment is appealing, mind the trendlines and be sure to enter and exit with a strategy.

A few related ETFs, although there are many more available:

• First Trust S&P REIT Index Fund (FRI): up 8.4% year-to-date

• iShares Dow Jones U.S. Real Estate Index Fund (IYR): up 10.6% year-to-date

• iShares FTSE NAREIT Real Estate 50 Index (FTY): up 6.9% year-to-date

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

Of the commercial real estate sector, it appears that office buildings and factory space have been the hardest hit.  Vacancy rates for office space is at 15.9%, the highest level in the past four years, while rents have fallen 6.7%, the sharpest decline in seven years, reports Katie Benner of Fortune Magazine. The sector has rebounded slightly from last year, however, it appears that relief will not be in sight until consumer spending increases and business traveling increases.

For investors who continue to be bearish on real estate, a potential play could be short funds, such as the ProShares UltraShort Real Estate ETF (SRS).  On the flip side, says Benner, REITs should begin to bounce back because they have a lot of cash on their books. This puts them in a position to take advantage of low prices caused by the economic downturn. In addition, REITs are required to distribute 95% of their income, so they tend to pay high dividends to investors.

Accessing REITs through an ETF can give you more diversified exposure to the sector and spread your risk around a little.

• First Trust S&P REIT Index (FRI): down 4.2% year-to-date

• Vanguard REIT Vipers (VNQ): down 3.3% year-to-date

For more stories on commercial real estate, visit our commercial real estate category.

Kevin Grewal contributed to this article.

The cost of land, homebuilding, taxes and homeownership exceeds what many people are able to afford as a result of slow personal income growth and inflation, remarks John F. Wasik for The Huffington Post.

Municipalities also favored upscale home developments since home values fuel property tax revenue that is used for schools and public services.  In between 2002-2005, home prices rose 45% in restricted areas for upscale building, whereas unrestricted areas rose 24%. Homeowners’ costs also increased as more infrastructure, schools and other public services were needed for these new suburbs.

Rather than waiting for foreclosures to abate, inventory to shrink, and financing to loosen up… Wasik points out there may be more problems than we thought.

In Wasik’s book The Cul-de-Sac Syndrome, he notes that the government will have to create incentives to build more affordable housing if homeownership were to increase, find a way to de-link property taxes from funding local services, eliminate tax breaks for mortgage interest and create policies that would make houses more energy efficient to reduce long-term costs.

Currently, housing stocks are still 70% off of their highs.

• First Trust S&P REIT Index (FRI): down 6.6% year-to-date

• Vanguard REIT Vipers (VNQ): down 5.4% year-to-date

John F. Wasik is also Tom’s co-author on iMoney.

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

Max Chen contributed to this article.

The past two years have been brutal for real estate investment trusts (REITs) and the funds that track them. They are regaining their popularity with investors as a cost-effective way to gain market exposure during a possible market rebound.

CNBC says that REITs are being looked at as long-term plays that will stand up against expected economic trends. Over just the past several weeks, publicly traded REITs have gone to the marketplace and raised more than $10 billion in equity, according to Real Capital Analytics. This is welcome news,  after the turmoil over the past two years saw REITs tumbling around 38%. Although 2009 saw negative numbers, March posted a 4.41%  gain and April saw a rise of just under 28%.

Many REITs are still below their long-term trend lines, however, so be sure to watch those. If REITs are something you’d like exposure to, be selective with purchases. The bigger, well-known trusts are the best bet, and look for companies that have issued equity in the last year, as these are the ones that are on the rebound, with solid, long-term growth possibility.

• First Trust S&P REIT Index (FRI): down 7.2% year-to-date; Digital Realty Trust 1.85% of assets; Essex Property Trust 1.16; Mack-Cali Realty Corp. 1.21%

• Vanguard REIT Vipers (VNQ): down 6.2% year-to-date; Digital Realty Trust 2.11%; Essex 1.41%; Mack-Cali 1.20%

The U.S. housing market slump that caused median home values to depreciate 24% since 2006 could bottom out next month but economists at Fannie Mae and Freddie Mac think a recovery won’t come until another year, writes Kathleen M. Howley for Bloomberg.

The economists also calculated that existing home sales won’t be selling at pre-boom levels until the third quarter of 2010 and home constructions won’t touch 1 million until 2011. For 2009, building starts will only total 496,000 homes, or the lowest since the end of World War II.

A backlog of bank-owned properties and foreclosures on pay option adjustable-rate mortgages will stop housing from playing its traditional role of boosting the economy. Analysts at Bloomberg estimate the world’s largest economy will only grow 1.9% next year.

Home prices in 20 major cities dropped 18.7% in March year-over-year as a result of foreclosures. The national median home price will continue to drop until 2011. The nationwide average home price has fallen 12%.

While it’s fine to try and spot bottoms, we suggest that you have a strategy in place and watch the trend lines in order to be sure that a bottom has indeed been hit.

• First Trust S&P REIT Index Fund (FRI): down 10.2% year-to-date

• SPDR S&P Homebuilders (XHB): up 3.4% year-to-date

Max Chen contributed to this article.

Federal Reserve Chairman Ben Bernanke said yesterday that he sees a bottom in the housing slump, but he also warned that any other jolts to the financial system could put a crimp in our recovery efforts. His assessment is based on the view that inventory liquidation will slow over the next few quarters.

But there are those who believe that no, the economic data does not support the idea that we have hit a bottom. Metrics used to measure this include:

• Median income vs. Median home price
• Ownership costs vs. Renting costs
• Market value of housing in relation to GDP
• Housing inventory and supply vs. Sales rates

Although housing prices have deflated, the metrics have not come down to typical levels, says Barry Ritholz for The Big Picture. There are three main reasons for this:

1. Asset classes which become wildly over-priced, such as what happened in the housing market,  do not merely revert to the mean — they tend to drop below the mean, eventually becoming significantly under-valued.
2. Job losses and income decreases lead to more distressed sales, with prices especially pressured. Falling prices make put mortgage holders under water — holding homes worth less than the mortgage. The recession has created a self-fulfilling cycle.
3. Factors outside of housing prices and interest rates are in the red. These include employment, lack of down payments, debt ratios of applicants, damaged credit for a lot of consumers, and non-purchase costs have risen substantially ie., property taxes, repair and maintenance and energy.

Although pending home sales were up last month, the majority of those were foreclosures. The other economic factors must mend before housing can make a clean recovery.

When following the trends, there’s no need to try and call a bottom. Instead, wait until there’s a clear uptrend before considering whether a position is a good one for you.

• First Trust S&P REIT Index Fund (FRI): down 11.6% year-to-date