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.

One big advantage of owning a real estate ETF over a single piece of property is simplicity, states My Money Blog.  An ETF has three marks in the “plus” column:

• It eliminates the trouble of finding tenants, dealing with local municipalities, maintenance issues, price bargaining or obtaining financing
• An ETF offers diversity and exposure to more than one property
• An ETF is more liquid and can be sold at any time – it’s not always so simple when it comes to owning property

As for physical ownership of real estate, it is more beneficial than owning an ETF because one can take advantage of tax benefits, and there are monthly cash flows as well as property appreciation.  Secondly, physical ownership enables one to gain access to detached single-family homes, something that ETFs don’t hold.

Which should you choose? At the end of the day, it is all about how diversified you want to be. After all, a single property could perform better or worse than an ETF, depending on the market.

The iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) is an ETF that tracks the FTSE NAREIT All Residential Capped Index and is the best comparison to physical ownership of real estate.  REZ carries an expense ratio of 0.48%, a current distribution rate of 5.11% and is down 10.4% year-to-date.

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

Kevin Grewal contributed to this article.

Analysts’ reactions to this plan is is dicey at best, as the chances that the rescue will trigger a housing recovery that in turn will boost stocks are small. Many analysts predict that this bailout will have little or no effect on the markets at all, reports the Associated Press.

Here are five observations about the housing bailout plan:

1. Who knows if it will work? The Obama administration pins its hopes for a housing turnaround on a plan that centers on making mortgages more affordable through lower interest rates and refinancing. Some analysts wonder why the plan doesn’t take a more direct approach toward principal reduction. The bigger question is whether homeowners can afford their reduced mortgage payments and still afford their homes.
2. Banks get minimal help. A recovery has to be led by the banks, and one part of the plan calls for judges to be able to step in and force banks to lower payments. Analysts say that will weaken bank balance sheets by reducing the value of the mortgage-backed assets and thus put pressure on share prices. In the end, you are left with the same credit risks and lower-yielding assets.
3. Psychological benefits are possible. Many analysts believe what this bill does more than anything is lift overall sentiment. While this plan is not likely to yield the turnaround Wall Street and others want to see, it can give way to a “cautious optimism.”
4. Or, it could make things worse. The worst-case scenario is that the plan to prop up troubled mortgages will not address the need for housing prices to fall to sustainable levels, which was the original intent. By putting off a foreclosure, it may only be delaying the inevitable and using more valuable taxpayers dollars in the meantime.
5. Investors should remain cautious. The scope of the homeowner relief plan is marginal at best. The majority of advisors do not use this bailout as a springboard for many to jump back into the market. At best, moderate spikes in consumer spending could abound, as well as ETF investors playing market movements to make some extra cash.

• iShares FTSE NAREIT Residential (REZ): down 14.7% over three months; down 11.6% over one week

• iShares FTSE NAREIT Real Estate 50 (FTY): down 8.5% over three months; down 10.3% over one week

The plan is intended to keep homeowners in their homes and  reduce further foreclosures, thus stabilizing the housing market. Tim Paradis for the Associated Press reports that hefty drops in housing prices and slow sales along with rising foreclosures have created the deepest recession in decades.

• iShares FTSE NAREIT Residential (REZ): down 20.3% over three months; down 6.7% yesterday

Big declines in building activity have caused construction of new homes and applications for future projects to fall to record lows. Martin Crutsinger for the Associated Press reports that analysts are hoping that the new government programs and the new lengths to stop foreclosures will help to increase building activity.

The Commerce Department reported Wednesday that construction of new homes and apartments dropped 16.8% last month to a seasonally adjusted annual rate of 466,000 units. This was under the 530,000 unit mark that was expected.

• iShares Dow Jones U.S. Home Construction (ITB): down 6.6% over three months; down 4.4% over one day.

Down the line from the foreclosures and slow building activity, industrial production has pulled back, as automakers and housing construction have slowed to all but a halt. This is proof of the downward spiral that the U.S. economy must reverse , or at least begin to withdraw from. Jeannine D’Aversa for the Associated Press reports that the Federal Reserve reported Wednesday that production at the nation’s factories, mines and utilities fell 1.8% last month.

Meanwhile, the ailing auto industry is back at the table, after the billions in government loans were already doled out. The companies, which have received $17.4 billion so far, filed plans with the government more than doubling that request to a staggering total of $39 billion, according to Tom Krishner and Ken Thomas for the Associated Press. Requests were surrounded with plans for thousands more job cuts, slashing of models and brands, union concessions and the prospect of even further expense cuts.

Saving Jobs. So far, the U.S. economy has been in a recession for 14 months, the stimulus package will unveil large spending and tax cuts. Jeremy Pelofsky and Richard Cowan for Reuters reports that Congress’s goal is to create or save 3.5 million jobs in an economy that has seen massive job losses since the recession began in December 2007.

AFP reports that President Barack Obama’s national intelligence director Dennis Blair said the global crisis, first sparked by so-called sub-prime loans in the United States, was now the top US security concern.

Easing Foreclosures. It is no surprise that the wave of bad mortgages and lending standards is what spiraled the economy into the state of crisis, and spurred the flood of home foreclosures. Brian Grow, Keith Epstein and Robert Berner report for Associated Press that unless the foreclosure surge eases, even the most extravagant federal stimulus spending won’t spur an economic recovery.

The Obama administration is expected to come up with an initiative of $50 billion to help out distressed homeowners. More than 1 million homes are in foreclosure and another 5.9 million are expected to foreclose in the next four years, giving the situation a new angle. Obama’s plan cannot stem this crisis alone; banks and lenders are going to have to take huge losses and make exceptions to keep homeowners under their roofs.

• iShares FTSE NAREIT Residential (REZ): down 14.9% over three months; up 0.2% in one week.

Lack of Confidence. Consumer confidence is reported to be at all-time lows, as measured by the Reuters/University of Michigan index, fell to 56.2 in early February from January’s late 61.2 reading. Consumer expectations are not too bright either, as Forbes reports that the index which measures sentiment in the months ahead, dropped to 49.1, the lowest level seen since May 1980.

Courtney Schlisserman for Bloomberg reports that declining stocks and the falling values of homes added to the bleak outlook of Americans’ view of their own financial well-being. The longest recession since 1982, including the loss of 3.57 million jobs, is changing Americans’ spirits, leading them to stop to spending.

• SPDR S&P Retail (XRT) up 11.2% over three months; up 0.4% in one week.

Vacancy rates for houses and apartments were just released and the jobless rates are haunting building owners more so than ever, reports Bill Radke for Marketplace. Whether renters are running home to dad and mom’s or hooking up with a roommate to alleviate costs, the demand is lowered across the board. Rental vacancies are at 10% this year, so far, and are forecast to grow even further.

Undermining the rental market are the record number of foreclosures. But from another point-of-view, the rental market can’t be big enough. It can go either way, depending on which side of the fence you are on.

Where there are vacancies in some areas, others are experiencing tight rental conditions and a competitive market, reports Sue McAllister for San Jose Mercury News. Record numbers of Silicon Valley homeowners have been foreclosed upon this year, and most must seek rental housing once they leave their homes. If tenant-occupied houses are in foreclosure, tenants nearly always get evicted, and so it goes.

iShares FTSE/NAREIT Residential Real Estate Fund (REZ) could feel the impact of the rental market, whether it tightens or grows. The fund is down 22.9% year-to-date.

iShares FTSE NAREIT Residential Real Estate Fund (REZ) is a passive method to jump on this trend and it is also cost-efficient. The fund holds companies that own, manage and/or invest in residential apartment properties.

Although the real estate sector in general has been battered, the rental market is in the process of expansion, with occupancy rates on the rise, demands increasing and rents on the upswing. The quality of tenant is going to improve as well, reports Thomas Smicklas for Grace Cheng Financial News & Opinions. In a climate where most potential homeowners are finding themselves unable to get credit, many aren poised to enter the rental market instead.

REZ is up 13.1% year-to-date.

Another advantage to owning this ETF is that real estate holdings are a good choice for income and tax advantages. Smicklas claims this to be one of the best times in 30 years to purchase existing rental real estate.

President Bush signed a major housing bill that is meant to provide mortgage relief for 400,000 homeowners. The move could help stabilize the financial markets and improve consumer confidence, reports Jennifer Loven for the Associated Press.

The measure allows homeowners who can’t afford their payments to refinance into more affordable, government-backed loans. It also delivers a temporary lifeline to Fannie Mae and Freddie Mac, giving the Treasury unlimited power through 2009 to loan them money or buy their stock. It also tightens the reins on the two businesses.

Also included is $15 billion in tax cuts, and a $7,500 credit for first-time homebuyers for homes bought between April 9, 2008 and July 1, 2009.

Real estate and homebuilder ETFs are trading lower today:

• Vanguard REIT Index (VNQ), up 1.7% year-to-date
• iShares Cohen & Steers Realty Majors (ICF), up 1.5% year-to-date
• iShares FTSE NAREIT Residential (REZ), up 15.4% year-to-date
• SPDR S&P Homebuilders (XHB), down 8.9% year-to-date

Meanwhile, provisions for a bailout and getting the oxygen of the economy flowing again have financial ETFs trading about even, including:

• iShares Dow Jones US Financial Services (IYG), down 30.7% year-to-date
• Financial Select Sector SPDR (XLF), down 29.8% year-to-date

The 2.6% drop was more than twice what had been expected, reports Martin Crutsinger for the Associated Press. Sales are also 15.5% below what they were a year ago.

Prices are continuing to slide, too: the median price for a home sold last month was $215,100, off by 6.1% from a year ago. It’s the fifth-largest year-over-year price drop on record.

Last week, it was announced that single-family homebuilding lost 5.3% in June.

On the upside, one economist feels that the housing rescue bill should help the housing market bounce back. The tax break it includes for first-time homebuyers could help sales.

Home construction and real estate ETFs are trading lower this morning on the news:

• iShares Dow Jones US Home Construction (ITB), down 5.7% year-to-date
• SPDR S&P Homebuilders (XHB), down2.4% year-to-date
• DJ Wilshire REIT (RWR), down 3.7% year-to-date
• Vanguard REIT Vipers (VNQ), down 4.2% year-to-date
• iShares FTSE NAREIT Residential Index Fund (REZ), down 17.5% year-to-date