Foreclosure Inventory Could Hinder Real Estate ETFs

As the number of foreclosures around the nation continues to climb, a massive flooding of these homes into the market could result in a supply shock which could eventually depress real estate prices, affecting the iShares Dow Jones US Home Construction (IYB), PowerShares Dynamic Building & Construct (PKB) and the SPDR S&P Homebuilders (XHB).

According to Clea Benson of Businessweek, the inventory of foreclosed homes that government-controlled Fannie Mae (FNMA) and Freddie Mac (FMCC) currently have has quadrupled over the past three years and stands at a whopping $24 billion.  Furthermore, the physical number of homes that these two companies own has increased to nearly 242,000 and is likely to continue going up.  In fact, RealtyTrac, a data company specializing in compiling data on residential real estate, expects the number of homes subject to foreclosure filings to rise by as much as 20 percent this year. 

A major reason this backlog is accumulating is because Fannie and Freddie have more homes than they can sell as supply outpaces demand and foreclosed houses flood these companies’ balance sheets.  Furthermore, both companies are trying to sell homes at prices that are near market levels and are giving preference to buyers who plan to use the home as primary residences, which is deterring investors and really putting a strain on the demand for these properties.   

On the positive side, the US economy appears to be heading in the right direction as consumer spending has started to increase and unemployment numbers are slowly improving, which could further boost consumer spending and entice individuals to purchase homes.  Although this trend is starting to emerge, the supply of homes on the market is expected to continue to significantly outpace demand, resulting in downward price pressure are taking a toll on the aforementioned ETFs.

Disclosure: No Positions

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