2010 ended on a high note for home sales, as December buying increased 12.8% from November -- the strongest pace it has seen since last May. But "strong" is a relative term when you consider the overall state of the sector.

Even with the year-end sales boost, December's inventory of unsold homes still stood at 8.1 months' supply, which means it would take that length of time to sell all homes on the market at the current rate.

Now consider that the average inventory over the last few years is just six months' supply. According to the National Association of Realtors, 2010 home sales fell to 4.91 million units, a drop-off of 4.8% from 2009 making it market's worst year since 1997. With foreclosures and unemployment still sky-high, home prices remain depressed.

Theoretically, this should attract first-time buyers, who can afford homes at a fraction of their cost a few years ago. But banks' credit standards are the strictest they've ever been, making it exceedingly difficult to obtain a mortgage. What's more, potential buyers are still unconvinced that prices have bottomed out. So as bad as 2010 was, 2011 could be even worse.

So are there any silver linings to the dark cloud looming over the housing sector? Perhaps. Home construction is expected to be up considerably over 2010 -- but that still only puts it at half where it needs to be to keep pace with population growth. And a housing shortage could eventually give prices the jolt the market so desperately needs.

And commercial property prices rose 0.6% in November from the previous month, according to Moody's Investors Services. But even with the recent increase, commercial real estate values are still 42% below the October 2007 peak.

Given the condition of the market, real estate isn't holding a lot of appeal to investors at the moment. But which Real Estate Investment Trusts (REITs) are looking more attractive than the rest?

For ideas, we had a look at short-seller activity. Short-sellers sell high in order to buy low, by borrowing shares from other investors, selling them on the open market, and closing the short by buying back the same number of shares initially borrowed. If the short-seller can buy back the stock at a lower price, he turns a profit off the difference -- basically, he's betting on his stock to lose.

All of these Real Estate Investment Trusts (REITs) have seen a significant decrease in shares shorted between 9/30-12/31. Meaning that short sellers seem to think the upside potential outweighs the downside potential of these names -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)

Real Estate Investment Trust

Performance Over Last Year

Shares Shorted Between 9/30-12/31

Redwood Trust (NYSE: RWT)


Decreased from 8.06M shares to 3.73M shares

Education Realty Trust (NYSE: EDR)


Decreased from 2.45M shares to 1.34M shares

Inland Real Estate (NYSE: IRC)


Decreased from 3.2M shares to 1.76M shares

Tanger Factory Outlet Centers (NYSE: SKT)


Decreased from 2.78M shares to 1.54M shares

FelCor Lodging Trust (NYSE: FCH)


Decreased from 3.83M shares to 2.17M shares

Equity LifeStyle Properties (NYSE: ELS)


Decreased from 1.8M shares to 1.05M shares

Newcastle Investment (NYSE: NCT)


Decreased from 3.17M shares to 1.93M shares

Senior Housing Properties Trust (NYSE: SNH)


Decreased from 3.26M shares to 2.01M shares

Strategic Hotels & Resorts (NYSE: BEE)


Decreased from 6.71M shares to 4.18M shares

Cedar Shopping Centers (NYSE: CDR)


Decreased from 2.45M shares to 1.54M shares

Short trends data sourced from AOL Money. The list has been sorted by the change in shares shorted over the last three months.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.