Two ETFs Likely To Be Hit By Increased Foreclosures

Despite a slowdown in foreclosure filings in December 2010, Irvine-based real estate database seller and tracker, RealtyTrac, expects the number of US households receiving foreclosure notices to significantly jump in 2011, putting additional stress on the US economy, homebuilders and the SPDR S&P Homebuilders (XHB) and the PowerShares Dynamic Building & Construct (PKB).

The total number of foreclosure filings in December totaled 257,747, marking the lowest monthly tally since June 2008 and an eight percent decrease from the prior month.  Furthermore, RealtyTrac suggests that this decline was driven by increased scrutiny over lenders and their practices.   Lenders in all 50 states are being investigated on whether or not banks and loan servicers used faulty documents and signatures on loan documents to execute and issue loans for those who did not qualify. 

As for 2011, the number of homes that are expected to receive a foreclosure filing are expected to grow by nearly 20 percent, dwarfing the record 2.87 million properties that received default, auction or repossession notices in 2010.  To put it into perspective, there are roughly 5 million seriously delinquent loans in the market that have yet to go into foreclosure, in addition to the more than 1 million homes seized by banks in 2010.

With unemployment remaining at stubbornly high levels, the Labor Department recently reported that first-time applications for unemployment benefits rose 35,000 from the previous week, pushing initial claim levels to their highest point since October, high consumer indebtness and tight credit markets, no sense of relief in the foreclosure mess is in sight. 

The likely result of this is a supply shock in the residential real estate market which could nearly double current supply rates.  Without improvements in the labor markets, people need jobs to obtain mortgages, regardless of what interest rates are doing, demand is not expected to keep up with supply resulting in an imbalance and downward price pressures on the sector as a whole. 

In a nutshell, 2011 could be a devastating year for the residential real estate markets.

As mentioned above, the SPDR S&P Homebuilders (XHB) could be heavily impacted by an increase in foreclosures hitting the market.   XHB seeks to replicate the performance of the S&P Homebuilders Select Industry Index which represents the homebuilding sub-industry portion of the S&P Total Markets Index.  XHB boast top holdings of Pulte Group (PHM), DR Horton Inc (DHI), KB Home (KBH) and Lennar Corp. (LEN). 

Another ETF that could be impacted is the PowerShares Dynamic Building & Construct (PKB).  PKB seeks to replicate the performance of the Building & Construction Intellidex Index and boasts top holdings such as Weyerhaeuser Co. (WY), NVR Inc. (NVR), Fluor Corp. (FLR) and Home Depot (HD)- all companies heavily involved in construction. 

Disclosure: No Positions

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