No two areas of the investment market have performed worse than the banks and real estate. If you're an investor, you've felt the financial pain that comes with such a dramatic underperformance over the past three years, but this isn't just a Wall Street story.

TUTORIAL: Exploring Real Estate Investments

This story affects nearly every consumer in some way. If you own a home, the value has likely plummeted and if you have tried to get a loan lately, you know that just to qualify your credit has to be almost spotless. (For related reading, see The Best Way To Borrow.)

If you have any type of retirement vehicle that included bank or real estate investments, you may be relieved to see that you've regained some of the ground lost in 2008 and 2009, but the losses are still there and for some, that means extra years in the workforce.

The underperformance of banks and real estate hits all of us in some way, so we're all too eager to see these two sectors return to the days of leading the world's economies.

The Story
You probably remember the story quite well, but think back to the early to mid 2000s when home prices were rising so fast that people couldn't buy real estate fast enough. Flippers were purchasing a home, investing a modest amount to modernize it, and selling it, sometimes making more money on one home than some people make in a year.

While that was happening, banks were dramatically increasing their lending to those with unimpressive credit, called subprime lending. In 2008, around 15% of all first-time homebuyer loans were subprime. That's almost twice the amount as just a few years earlier when it was about 8%.

Overinflated home prices would come crashing down in 2008, bringing the economy with it. This would leave banks holding mortgages for people who no longer had a means of paying the loan, causing some banks to file for bankruptcy or need government bailouts. (To learn more, read Top 6 U.S. Government Financial Bailouts.)

How About Today?
The health of banks is slowly recovering and signs of life are appearing in some real estate markets, but the effects of 2008 and 2009 are still weighing on these sectors. Bank of America (NYSE:BAC) was the worst performing Dow stock of 2011, down about 59%, while JP Morgan Chase (NYSE:JPM) was the fourth worst, losing around 22%.

The latest FNC Residential Price Index showed a continual weakening of home prices with a seasonally adjusted drop of 0.6% in October of 2011. This indicates that although consumers are slowly coming back to the real estate market, there is still a large oversupply of homes, which is keeping values in decline. (For more information, read The Truth About Real Estate Prices.)

Outlook for 2012
If you're still holding onto bank stocks, it might be another difficult year for that portion of your portfolio. With the troubles in Europe, along with increasingly bank unfriendly legislation coming out of Washington, these stocks are still seeing no true signs of life other than short term bounces in price that are quickly knocked back down. Some analysts believe that 2012 might be the year for the banks to return to life, as the health of their balance sheets improve.

So, what about real estate? Don't expect a return to the glory days of rapidly appreciating home prices, but as the health of the economy improves and more people go back to work, home ownership will pick up, according to experts. It's impossible to time the market, so we can only hope that these two important sectors of our economy soon return to health, allowing all sectors of the economy to improve.

The Bottom Line
If you're a stock investor, remember that there are thousands of stocks, many with better short-term outlooks than banks or real estate. Consider investing in other sectors until signs of real life return to the financials and real estate. (For related reading, see Top-Down Analysis: Finding The Right Stocks And Sectors.)

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