Demand for housing has taken a major hit, evident by the record 17% decline in existing-home sales recorded in December. Many observers suggest that downward price pressures are imminent. According to the S&P/Case-Shiller Home Price Index, home prices have gained roughly 4% from their 2009 lows. There are plenty of market forces that likely will work against the index and bring prices down.

First, inventory levels remain elevated and are likely to trend upward.To add to the inventory woes, foreclosures are expected to flood the market. From a lending perspective, mortgage rates have been driven down by the Fed’s decision to keep interest rates at exceptionally low levels. These favorable rates are generally only available to those who have hefty down payments and high credit scores. To make things even worse, an optimistic economic assessment released by the Federal Reserve yesterday failed to repeat its assertion that the housing market is improving. Additionally, it appears that the extension of the $8,000 first-time homebuyer tax credit didn’t give the sector the boost that was so strongly desired. Lastly, from a macroeconomic perspective, existing-home sales will likely feel downward price pressures.

Some ETFs that should keep these forces in mind include:
The SPDR S&P Homebuilders(XHB Quote)
The iShares Dow Jones US Home Construction(ITB Quote)
The iShares Dow Jones US Real Estate(IYR Quote)

These ETFs have seen a nice upward trend over the past year, but this could come to an end. To help mitigate the risks involved with investing in them, it’s important to use an exit strategy with triggers at price points that represent abnormal price weaknesses.