It appears De Nile is not just a river in Egypt, as homeowners will not accept that their home has lost value over the past year, evidenced by the state of the market and exchange traded funds (ETFs).

According to an online survey, three out of four homeowners believe their home hasn’t lost value and 36% actually believe their home has increased in value. Chris Isidore for CNN Money says that what this reveals is that people either aren’t paying attention to what’s been happening in the housing market, or they are in denial about their home’s value.

Zillow, the addictive website that surveyed this information, reports that there is an average decline of 5%, with many markets posting steeper declines. The National Association of Realtors show the median price of an existing home sold in 2007 fell 1.4% from 2006, and another 1.2% decline is expected for 2008, on the conservative side. A recent Los Angeles Times story reported that homeowners are no longer being allowed to tap into their equity.

So, what’s with all the unfounded optimism? Turns out that it’s not so much that homeowners are donning their rose-colored glasses, but that they’re in a grieving process. Many are in denial and disbelief, and someday, they’ll be on the road to acceptance.

But this denial may just prolong the housing slump longer and make it more difficult because home sellers will be slow to adjust their prices to the newer market reality.

Related ETFs that may benefit once the grieving process is complete:

  • SPDR S&P Homebuilders (XHB)
  • iShares dow Jones US Real Estate (IYR)
  • iShares Dow Jones US Home Construction (ITB)

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.