This from Investor’s Daily Edge:

A little over a week ago, in my Monday column, I correctly predicted that the December Housing Starts and Building Permits reports would miss the mark by a wide margin. I even correctly picked the actual number. This past Monday, my prediction was that the December Existing Home Sales report would also likely disappoint. I wasn’t such a good fortune teller the second time around.

The December Existing Home Sales report actually surprised to the upside, posting a gain of 6.5 percent versus November. This equates to roughly 290,000 units.

It turns out that I just underestimated how bad the housing market is. These sales aren’t from eager buyers who got priced out of the market during the run up over the last few years. The buyers are vultures, swooping in and cleaning the carcass. Over 45 percent of the sales were “distressed” according to the report.

That is bad news for the market. It is just the beginning of a viscous cycle.

Foreclosures continue to drive down prices in all markets. As a result, more and more homeowners see their equity vanishing. Many more find themselves underwater. This leads many to simply throw in the towel and let their own home go into foreclosure, feeding the cycle.

Another item to consider is whether or not all the bank-owned foreclosures are even back on the market yet. There is growing evidence that banks are holding back properties from being re-listed to avoid flooding the market, which would result in prices being driven down below what they hope to get for the repossessed homes. This means there could be an additional backlog of properties that we aren’t even aware of yet. This will delay any recovery.

Finally, a major question that needs to be answered is how many people actually qualify to buy a home? Fannie and Freddie are said to be toughening up on standards, and banks are just flat out not lending. That means short of a huge down payment or an all-cash purchase, buying any home, foreclosure or not is going to be difficult. And the housing market needs buyers to move the inventory.

With all this gloom in the market, it is going to take quite some time for a recovery. That leaves you plenty of time to profit from the slide in the housing market. One way is shorting the iShares Real Estate Index (IYR), another is shorting the Vanguard REIT ETF (VNQ). Both have already seen a significant down leg, but with the housing market the way it is, there is still plenty of room to the down side.

A more speculative play could be the UltraShort Real Estate ProShares (SRS). This ETF moves inverse to real estate, so it goes up as the market goes down. A quick look at the chart shows a huge spike in November and a drop since then. It is now trading at two-year lows, so you could view it as a more speculative play on the continuing decline of the housing market.

Source: There Is Still Money To Be Made in the Housing Market

Eric Roseman says the US REIT sector is likely to recover first. That’s because Europe and Asia are behind the US in the credit crunch cycle and have further to fall.

Pending home sales index bounced 7.4% in September. And government-auctioned foreclosures create great property bargains. Eric says iShares Real Estate ETF (NYSE:IYR) is one good way of playing this recovery.

This from The Sovereign Society:

Since the onset of the subprime mortgage crisis 14 months ago, REITs  have plunged in value – with the biggest declines happening in Europe, Eastern Europe, and Asia.

The turning point for REITs came in early 2007. At the time, an enormous number of new offerings hit the scene and the “bubble” began to simmer. REIT sponsors went hog-wild, with easy credit and the lowest interest rates in a generation.

REITs boomed recently in the Pacific where policymakers introduced new legislation that allowed REIT structures in Japan, Singapore, and Hong Kong.

But REITs have plummeted more than 15% over the last 12 months in Singapore, and they’re down in excess of 45% in Australia. In Japan, J-REITs have tanked almost 30% over the last 12 months and remain 25% off their best levels in the United States.

The Big Chill

In addition to the problem of over-abundant supply, the ongoing credit crisis has also hit REIT values hard over the last year. That’s because developers and property managers require access to credit to expand or modernize existing properties.

With even the highest quality of loan candidates struggling to raise capital this year, it’s no wonder the sector has correlated almost perfectly with bank stocks.

In Asia, 2008 has been especially painful for REITs as the growing credit crisis, falling stock markets and plunging asset prices resulted in the cancellation of offerings.

The credit squeeze has made it much harder to raise equity and debt to finance deals. So now some smaller and mid-sized REITs are now threatened by questionable business models.

It’s the same phenomenon spreading to Europe and even fast-growing Eastern Europe as REIT values have collapsed. Even in red-hot China, many construction companies have either failed or remain technically insolvent as the big real estate boom cools off.

Beyond the Bear…Batting Cleanup on the REIT Crash

The United States REIT sector might lead the rest of the sector to recovery over the next 12 months, assuming the credit crisis ends and banks begin lending again.

But while U.S. REITs have shown signs of bottoming this year, regional REITs in Europe and the Pacific are still in the midst of sharp corrections.

Indeed, as economic growth slows across Europe and Asia over the next several months and more credit-related turmoil spreads to Europe, the United States is starting to look like a relative safe-haven. You see, the ongoing credit crisis hit America first. With the latest passage of the bailout bill in Congress last Friday, markets might start looking at the United States REIT sector as a bell-weather ahead of a recovery.

And we’re already starting to see some positive movement. Since July, the iShares Real Estate ETF (NYSE:IYR) has gained almost 10%, excluding dividends. It’s the same story for most banks over the same period, boosted by the Securities and Exchange Commission (SEC) short selling ban.

The U.S. REIT sector is worth watching carefully. The sector has already been trashed and – from a technical perspective – appears to have formed at least a short-term bottom in late July. Sentiment should improve following the bailout bill.

Still, the country is now in an economic recession and the ongoing contraction might last longer than average recessions because of the massive accumulation of debt and leverage-loan financing.

Pacific REITs will likely be forced to consolidate in the months ahead and that will pose regulatory challenges to corporate charters and shareholders. It’s too early to buy Asian REITs.

Europe, on the other hand, now faces a deeper credit squeeze as bailouts and a new wave of failures comes home to roost. The United Kingdom, Ireland, Spain and Denmark are all home to big real estate busts and it’s spreading. It is unlikely European REITs will bottom until at least late 2009.

Best Buys in Spain, US Foreclosures

For individual investors – especially dollar-based investors – the ongoing contraction in sun-belt values across the Spanish coast looks appealing.

The U.S. dollar is mustering a powerful bear market rally since its July lows, and it’s already soared more than 13% over the last 10 weeks against the euro. Combined with lower interest rates across the Eurozone later this fall or into 2009, financing costs should become more affordable for prospective buyers in the popular Costa del Sol region.

The United States can expect more government auctioned foreclosures in 2009, and that means big bargains for speculators and investors alike. Banks are desperate to remove non-performing loans from their clogged portfolio of real estate deals.

The last bear market in U.S. residential property in the early 1990s resulted in a plethora of deals for distressed buyers in Florida and California, among other states. This bout of real estate deflation now widespread across many regions will result in even greater bargains.

It’s no wonder Europeans have been active buyers of U.S. real estate since 2007 during a strong euro until recently. Now it’s time for Americans to buy domestic, too.

Source: Global REIT Boom Ends with a Thud, and Now It’s Time to Pick up the Pieces